This study investigates the macroeconomic determinants of the exchange rate gap in the Iraqi economy, defined as the deviation between the official exchange rate and the parallel market exchange rate of the Iraqi dinar, which serves as an indicator of black market activity and distortions in the foreign exchange market. The study relies on annual time-series data covering the period 2004–2025 and employs the Ordinary Least Squares (OLS) regression model with dummy variables to capture structural changes during the study period. The explanatory variables include government expenditure, oil revenues, broad money supply, and foreign exchange reserves as major macroeconomic determinants of exchange rate gap dynamics. The empirical results indicate that the model possesses relatively strong explanatory power, with an adjusted R-squared of approximately 77.5%, alongside overall statistical significance. The findings reveal that oil revenues are the only variable exerting a statistically significant negative effect on the exchange rate gap, implying that higher oil revenues contribute to narrowing the gap between official and parallel exchange rates through improving foreign currency availability and reducing pressures in the parallel market. In contrast, government expenditure, broad money supply, and foreign reserves do not exhibit statistically significant short-run effects. The results further demonstrate the presence of structural breaks and exceptional economic shocks during specific years of the study period, reflecting the influence of unstable economic conditions and policy shifts on the foreign exchange market. Overall, the study concludes that fluctuations in Iraq’s exchange rate gap are primarily associated with oil-related factors and structural economic changes, while the short-run effects of fiscal and monetary variables remain relatively limited.
