Title: CLIMATE SHOCKS AND MACROECONOMIC POLICY RESPONSES: AN EMPIRICAL AND FORWARD-LOOKING STUDY OF IRAQ (2004–2025)

Authors: Hasan Khalaf Radhi, Alaa Mahdi Mohammed and Saif Mohammed Hasan Algburi

Abstract: This paper empirically explores the transmission dynamics of climate-induced economic shocks and their subsequent spillovers onto macroeconomic stability parameters—specifically, real GDP growth trajectories and inflationary pressures—within the Iraqi economy over the 2004–2025 timeframe. The analytical core of this inquiry evaluates the capacity of existing macroeconomic buffers to neutralize non-linear structural dislocations triggered by climatic vulnerabilities in a highly concentrated rentier system. To operationalize this assessment, quantitative metrics for both “Fiscal Policy Space” and “Monetary Policy Space” were rigorously constructed. The empirical strategy employs an advanced Vector Auto regression (VAR) framework, augmented by Impulse Response Functions (IRFs) and Forecast Error Variance Decomposition (FEVD). This is integrated with a structural co-causality diagnostic applied to a quarterly dataset of 88 observations. Furthermore, the study utilizes dynamic simulations to project counterfactual macroeconomic scenarios for Iraq through 2030. Diagnostic tests for structural stability corroborate the model’s robust specification, evidencing that all inverse roots of the characteristic AR polynomial are strictly confined within the unit circle. Causality estimations capture a unidirectional structural transmission channel flowing from climate-economic perturbations directly toward amplified inflation, stunted output growth, and fiscal space contraction. Insights from the variance decomposition reveal that climatic anomaly (notably, acute thermal spikes and severe evaporation rates) account for approximately 32% of output volatility and 29% of inflation variance over the long-run horizon. Projections spanning the extended 2004–2025 series highlight a profound depletion of the fiscal space—converging toward the zero bound—exacerbated by compounding debt obligations and relentless oil market volatilities. Conversely, the monetary policy space retains an accommodative margin of 28% by 2025, contingent upon holding inflation below the critical stabilization threshold of 7%. The paper concludes by advocating targeted policy interventions, predominantly the deployment of green financing mechanisms and ecological credit easing, to foster long-term, sustainable macroeconomic resilience.

Keywords: Climate Economy, Monetary Policy Space, Fiscal Space, Vector Auto regression (VAR) Framework, Structural Granger Causality, Green Credit Financing, Iraq.

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