The effect of an interest-free banking system on level and volatility of inflation: a GARCH model

Karim Eslamloueyan

Applied Economics Letters, 2008, vol. 15, issue 11, 879-882

Abstract: Some Muslim researchers argue that a no-interest financial system better achieves the goal of price stability. Using a GARCH model, this article examines the effect of an interest-free banking system on level and volatility of inflation in a country with a full-fledged no-interest financial system. Iran is chosen for our case study because it has initiated the most far-reaching experiments with interest-free banking in the Muslim world. The results indicate that the new financial setting in Iran has reduced inflation uncertainty but has failed to lower the level of inflation.

Date: 2008
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DOI: 10.1080/13504850600892840

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