Oil Dependency and Fiscal Policy in Iraq: Insights from a Time-Varying Parameter Model

Abstract

This research examines the relationship between oil revenue growth and government expenditure growth in Iraq from January 2010 to December 2023 using the Bayesian Time-Varying Parameter Vector Autoregression (TVP-VAR) method. The findings reveal a significant positive correlation between oil revenues and government spending, with government expenditures responding to increases in oil revenues with a time lag. However, the influence of oil revenues on government spending diminishes over successive periods, suggesting a potential stabilization or shift in fiscal priorities. Given the volatile nature of oil markets and the associated economic risks, the study underscores the necessity for Iraq to diversify its revenue sources. Key policy recommendations include reforming fiscal policies, investing in human capital, enhancing governance, and promoting sustainable practices to build a more resilient economic structure less reliant on oil revenues.