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Can GDP growth rate be used as a benchmark instrument for Islamic monetary policy?

Md Akther Uddin

MPRA Paper from University Library of Munich, Germany

Abstract: This paper discusses Islamic monetary policy which could potentially be a sustainable alternative to the conventional. Islamic banks and financial institutions have to set their benchmark based on London Interbank Offered Rate (LIBOR) which raises doubt and controversy of the uniqueness of Islamic finance. By analyzing current literature on Islamic monetary policy models it is proposed in this study that GDP growth rate adjusted for interest income and inflation can be set as a benchmark for money market instrument and reference rate for financial and capital market to set the cost of capital or rate of return. In order to test the two proposed models, one year data from 99 countries have been collected. The study uses the OLS regression and the result shows that real interest rate is not a viable instrument for monetary policy framework as no significant relationship has been found with key factors such as inflation and unemployment. On the other hand, GDP growth rate has a statistically significant relationship with inflation and unemployment, GDP growth rate is higher for OIC countries, however, unemployment rate is higher.

Keywords: Monetary Policy; Islamic Monetary Policy; Real Interest Rate; GDP Growth Rate; Inflation; Real Exchange Rate; Gross Savings (search for similar items in EconPapers)
JEL-codes: E0 (search for similar items in EconPapers)
Date: 2014-12-18
New Economics Papers: this item is included in nep-mac and nep-mon
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