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Central banking and monetary management in islamic financial environment

Author

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  • Hanif, M. Nadim
  • Sheikh, Salman

Abstract

Continuous growth in Islamic finance calls for studying the framework in which the monetary policy maker (i.e., central bank) performs its functions. Central banks in Muslim countries are using various instruments for monetary policy purpose including interest rate. As a result, Islamic financial institutions (IFIs) are facing issues in benchmarking the price of financial instruments. Acceptable solution to benchmarking lies in the presence of a real economic activity in the base of any proposal and its feasibility for business performance when put against conventional banking. This paper presents empirical evidence of statistical equivalence of nominal GDP growth rate and official interest rate for ‘advanced,’ ‘all,’ and some Muslim countries. We propose nominal GDP growth rate as benchmark for pricing domestic financial transactions of IFIs as well as for pricing external bilateral/ multilateral loans. The paper also suggests nominal income targeting as monetary policy regime.

Suggested Citation

  • Hanif, M. Nadim & Sheikh, Salman, 2009. "Central banking and monetary management in islamic financial environment," MPRA Paper 22907, University Library of Munich, Germany, revised 25 May 2010.
  • Handle: RePEc:pra:mprapa:22907
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    File URL: https://mpra.ub.uni-muenchen.de/23548/1/MPRA_paper_23548.pdf
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    References listed on IDEAS

    as
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    4. Walter Fisher & Franz Hof, 2000. "Relative consumption, economic growth, and taxation," Journal of Economics, Springer, vol. 72(3), pages 241-262, October.
    5. Michael Rauscher, 1997. "Conspicuous consumption, economic growth, and taxation," Journal of Economics, Springer, vol. 66(1), pages 35-42, February.
    6. Liu, Wen-Fang & Turnovsky, Stephen J., 2005. "Consumption externalities, production externalities, and long-run macroeconomic efficiency," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 1097-1129, June.
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    Citations

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    Cited by:

    1. Shaikh, Salman, 2012. "Interest Based Financial Intermediation: Analysis and Solutions," MPRA Paper 42500, University Library of Munich, Germany.
    2. Uddin, Md Akther, 2014. "Can GDP growth rate be used as a benchmark instrument for Islamic monetary policy?," MPRA Paper 67696, University Library of Munich, Germany.
    3. Uddin, Md Akther & Halim, Asyraf, 2015. "Islamic monetary policy: Is there an alternative of interest rate?," MPRA Paper 67697, University Library of Munich, Germany, revised 07 Jun 2015.

    More about this item

    Keywords

    Islamic Finance; Central Bank; Interest Rate; Nominal Income Targeting;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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