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

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  • Hadian , Mehdi

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

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.

Suggested Citation

  • Hadian , Mehdi, 2017. "Islamic Finance and the Fluctuations of Investment and Output: The Role of Monetary Policy," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 12(3), pages 277-293, July.
    • Handle: RePEc:mbr:jmonec:v:12:y:2017:i:3:p:277-293
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    Cited by:

    1. Hassan Dargahi & Mehdi Hadian, 2022. "Oil shocks, financial stability and implementing macroeconomics and macro‐prudential policies in an oil‐exporting economy," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2481-2496, April.

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    More about this item

    Keywords

    Islamic Finance; Investment; Macroeconomic Stability; DSGE;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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