Islamic Finance and the Fluctuations of Investment and Output: The Role of Monetary Policy

Mehdi Hadian ()
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Mehdi Hadian : Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran

Journal of Money and Economy, 2017, vol. 12, issue 3, 277-293

Abstract: The recent global financial crisis once again revealed the harmful effects of interest-based contracts in the conventional financial system. Islamic finance, as an alternative financial system, discourages interest rate and debt financing. This paper investigates the effects of two financial systems, namely the conventional and Islamic systems, on macroeconomic variables. To achieve this goal, a DSGE Model with two monetary rules, one for conventional financial system and the other for Islamic financial system, has been designed. Comparing the dynamics of the models, the results of this study show that, in response to different shocks, investment and output in Islamic finance are less volatile than those of conventional financial system. Moreover, the process of adjustment in Islamic system is faster than that of the conventional system. These results imply that promoting Islamic finance has a great role in macroeconomic stability and covering the effect of financial crises.

Keywords: Islamic Finance; Investment; Macroeconomic Stability; DSGE (search for similar items in EconPapers)
JEL-codes: C61 E12 E44 E63 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:mbr:jmonec:v:12:y:2017:i:3:p:277-293

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