Iraqi economy is suffering from high dependency on oil revenue as the only significant source of
financing the economic development and government expenditure. So any fluctuation in oil
revenue will be transferred directly into government revenue, and then to its ability to fund
economic and development programs, and meet the social responsibilities of being the big
employer of Iraq economy. This will make Iraqi economy venerable to any exogenous shock of
Our study explores the impact of positive and negative oil price shock on macro variables of the
Iraqi economy. We applied the VAR model to estimate the model with three scenarios of shocks.
The first one is the historical oil prices and how the Iraqi economy responding to a shock in it.
The second model presenting the positive shock of oil real price and the third model is to capture
the negative impact of oil real price shock.
We used the Impulse Response Function (IRF) to test the effect of an oil shock on Iraqi macro
variables. This will provide us with qualitative measure of the impact of a shock in oil prices on
Iraqi economy. To capture the quantitative effect of our VAR models, we employed the Variance
Decomposition Analysis. The empirical results show that Iraqi economy is widely opened and
venerable to positive and negative oil price shocks.
We concludes that decision makers has to take the diversity of government revenues issue
seriously in order to increase Iraqi economy resistant and immunity to oil external shocks.