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Fiscal Policy In An Islamic Economy And The Role Of Zakat


  • Mohammed B. Yusoff

    () (Department of Economics, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, P. O. Box 10, 50728 Kuala Lumpur, Malaysia)


This study incorporates zakat into a simple macroeconomic model of an Islamic economy and analyzes the role of zakat in the national income determination. The reduced form aggregate consumption function suggests that the determinants of consumption are: Zakat expenditure, taxes, income and asset holdings of individuals. Zakat could be used as a counter-cyclical policy through discretionary and non-discretionary fiscal policy. Discretionary fiscal policy is carried out by varying the disbursement of zakat to the recipients. During the expansion phase of the business cycle, the government reduces zakat expenditure to close the inflationary gap. This action helps increase the zakat surplus, in the Baitul-Mal. Likewise zakat expenditure could be increased by using the zakat surplus accumulated during the boom periods, when the economy is in the down-swing to spur aggregate spending and economic activities. Therefore, zakat could complement taxation and government spending as tools of stablization policy.

Suggested Citation

  • Mohammed B. Yusoff, 2006. "Fiscal Policy In An Islamic Economy And The Role Of Zakat," IIUM Journal of Economics and Management, IIUM Journal of Economis and Management, vol. 14(2), pages 117-146, December.
  • Handle: RePEc:ije:journl:v:14:y:2006:i:2:p:117-146

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    References listed on IDEAS

    1. Hamid Zangeneh, 1995. "A Macroeconomic Model of an Interest-free System," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 34(1), pages 55-68.
    2. Munawar Iqbal & David T. Llewellyn, 2002. "Introduction," Chapters,in: Islamic Banking and Finance, chapter 1 Edward Elgar Publishing.
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    More about this item


    Fiscal policy; Islamic economy; Zakat.;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General


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