The Impact of Cash Liquidity and Interest Rates on Bank Credit for the Period 2004-2024: An Econometric Study of the Iraqi Economy

Talib Abd Ashaq, Hisham; Saleem Helal, Jenan

doi:10.33916/qjae.2026.01261272

	The Impact of Cash Liquidity and Interest Rates on Bank Credit for the Period 2004-2024: An Econometric Study of the Iraqi Economy
AL-Qadisiyah Journal For Administrative and Economic sciences
Volume 28, Issue 1, April 2026, Pages 261-272 PDF (528.96 K)
Document Type: Research Paper
DOI: 10.33916/qjae.2026.01261272
Authors
Hisham talib abd ashaq; jenan Saleem helal
University of Al-Qadisiyah
Abstract
The impact study of economic variables varies among countries depending on the nature of their economic activities and their macroeconomic policies. For example, the rentier nature of the Iraqi economy has resulted in structural fragility, which has clearly affected the behavior of economic variables. This research focuses on two key monetary policy variables (monetary liquidity and interest rates) and examines their impact on bank credit, the primary channel for transmitting monetary policy effects to the real sector. The research also attempts to provide an applied model for the effectiveness of monetary tools in an unstable economic environment. Furthermore, the research employs an advanced econometric methodology using both time series and panel data for seven commercial banks for the period 2004-2024. Panel ARDL (Auto-Regressive Distributed Lag) models are applied, allowing for the measurement of both short-term and long-term effects. Three sub-models are designed to estimate the relationship: one for total bank credit, one for cash credit (direct financing), and one for contractual credit (guarantees and letters of credit). The assessment revealed varying relationships between the monetary policy indicators under investigation and both types of bank credit. In the long term, the results confirmed that bank liquidity plays a pivotal role in supporting banks' lending capacity. In the short term, the results demonstrated the existence of corrective mechanisms for imbalances, with adjustment times ranging from 0.67 to 1.22 years to return to long-term equilibrium. As is well known, monetary policy Quantitatively, the Panel ARDL estimation revealed that in the long run, a 1% increase in bank liquidity (cash-to-assets ratio) leads to an expansion in total bank credit by approximately 0.66%. Conversely, the interest rate exhibits a significant negative long-term impact, where a 1% increase is associated with an 11.23% contraction in total credit. In the short run, the error correction mechanism (ECM) coefficients, ranging from -0.67 to -1.22, confirm a statistically significant speed of adjustment towards long-run equilibrium. Empirical results further indicate a differentiated impact across credit types; cash credit is more sensitive to liquidity changes, while contractual credit shows greater inertia and is less directly influenced by short-term interest rate fluctuations in Iraq faces structural challenges that hinder the efficient transmission of its effects to the credit sector. Therefore, the research suggests the necessity of adopting balanced monetary policies that take into account the specific nature of the Iraqi economy, while emphasizing the importance of strengthening the bank's independence The central bank and the development of unconventional monetary policy tools. The research also suggests the need to address structural imbalances in the macroeconomy to support the effectiveness of monetary policy in achieving its objectives.

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