The Measuring Inflationary and Deflationary Gaps, as an Indicator for Monetary Policymakers: An Analytical Study in Iraq

Abstract

Predicting the nature or level of inflation in the near future is one of the vital topics that is indispensable if one does not want to face unfavourable or undesirable conditions. This correct and accurate prediction can eliminate potential risks that may affect various basic economic variables, which can then be directed in the desired direction to achieve the desired goals. Hence, the importance of research. This research aims to highlight the most important criteria used to measure inflationary and deflationary gaps, and then attempt to use those gaps to predict what inflation and deflation will be like in the future. After presenting the theoretical framework of the research, the research attempts to apply this to the research sample using actual numbers derived from official sources to reach conclusions from this research. The research concluded that its hypothesis, which confirms a direct significant relationship between inflationary (deflationary) gaps and inflation (deflationary), was partially achieved, relatively, and not absolutely. The explanation is that the percentage of income allocated to investment in Iraq, at least during the research period, is tiny. Therefore, negative gaps appeared for most of the research period, especially until 2010. Also, demand (whether direct or indirect), as confirmed by most criteria for measuring gaps, was at a level that did not greatly exceed supply, which made us obtain those gaps, which nevertheless can be relied upon, relatively speaking, to predict future inflation (deflation).