Headline on an article in Lebanon’s Daily Star: “Iraq's Central Bank builds credibility with rock-steady dinar value”. Meaning:

The dinar's current value of 1,465 to the benchmark U.S. dollar is virtually unchanged from January 2004, when the introduction of new banknotes to replace the Saddam-era denominations was completed.

But the same article, a few paragraphs later, shows that there’s a fly in the ointment:

In May, CBI governor Sinan al-Shabibi was quoted by Reuters as forecasting that the inflation rate, estimated at 30 per cent in 2004, could fall to 20 per cent this year. The CBI currently estimates annual inflation at around 17 percent.

A basic arbitrage proposition of monetary economics (“purchasing power parity”) tells us that two currencies can’t maintain a fixed exchange rate (together with free trade and financial markets) unless they have the same inflation rate. US dollar inflation isn’t anywhere near 20-30 percent. So I’d say the headline is precisely wrong: the Iraqi monetary expansion that is driving 20-30% inflation is on a collision course with the fixed exchange rate. Continued pegging of the exchange rate at its present "rock-steady" level is not credible. Expect a devaluation unless the central bank brings inflation down.

How to bring inflation down? Some western economists have suggested inflation targeting for Iraq. But as Matt Sekerke and Steve Hanke calmly point out (pdf file), Iraq presently lacks what would seem to be the minimal institutional requirements for inflation targeting (a functioning banking system, a market for government bonds, etc.). Dollarization is the more reliable option for bringing actual credibility to Iraq’s money.