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The Islamic Rate of Return Versus the Nominal Rate of Interest: A Macroeconometric Model

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  • Ibrahim L. Awad

    (Qatar University)

Abstract

This paper investigates the question of “will the replacement of the nominal interest rate by the expected Islamic real rate of return have positive consequences on the macroeconomic performance?” The study adopts a dynamic small-scale macroeconometric model, which describes the transmission mechanisms among macroeconomic variables under three scenarios about the Islamic real rate of return. The baseline model and the model scenarios are solved using the stochastic simulation. The results of the study indicate that scenario 1 of a zero Islamic real rate of return, or equivalently a zero real interest rate, is superior over other model scenarios, given the priority of the goal of price stability among other objectives of monetary policy.

Suggested Citation

  • Ibrahim L. Awad, 2021. "The Islamic Rate of Return Versus the Nominal Rate of Interest: A Macroeconometric Model," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 47(2), pages 253-272, April.
    • Handle: RePEc:pal:easeco:v:47:y:2021:i:2:d:10.1057_s41302-020-00170-8
    DOI: 10.1057/s41302-020-00170-8
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    References listed on IDEAS

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    More about this item

    Keywords

    Macroeconometric model; Monetary policy; Islamic banks;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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