Abstract When we accept money and its functions in the Islamic economic framework, the same as all other economic systems, we should consider monetary policy as an important available tool for governments to pursuit macroeconomic objectives. But the problem is that, in the conventional economic system, the interest rate plays a critical role for executing monetary policy while in the Islamic economic framework, interest rate is forbidden according to Shariah rules and we are not allowed to use interest based instruments for monetary policy. The dominant view between Islamic scholars is that, since interest based instruments like open market operation is forbidden in Islamic economics, hear, we should only use monetary aggregate instruments like credit ceiling for executing monetary policy. But in reality, many Islamic countries do not restrict theirselves to only monetary aggregate instruments; instead, they use widely profit rate instruments like Musharakah certificates as a substitute for interest based instruments. What we discuss in this paper is the explanation for this gap between theory and practice in the monetary policy of Islamic economic system. Comparing interest based instruments and monetary aggregate instruments from economic point of view shows that, when we use interest based instruments, there is more macroeconomic stability in goods and money markets after executing monetary policy. This advantage of interest based instruments over monetary aggregate instruments has made monetary officials of Islamic countries like Islamic republic of Iran, use extensively profit rate instruments like Musharakah certificates for executing monetary policy.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
4837.
Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
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