5 Chapter The impact of external shocks on the dynamics of macroeconomic variables in Iran (Islamic versus conventional monetary rule)

5 Chapter

The impact of external shocks on the dynamics of macroeconomic variables in Iran (Islamic versus conventional monetary rule)

ByZahra Afshari, Maryam Soleimani Movahed

Book: Islamic Monetary Economics

Edition1st Edition

First Published2020

ABSTRACT
From the theoretical view, Islamic economics is different from conventional economics because interest rate—riba—is prohibited. An exclusive feature of Islamic economics is its profit-and-loss sharing paradigm, which is predominantly based on the Mudharabah (profit-sharing) and Musyarakah (joint venture) concepts of Islamic contracting. The aim of this chapter is to determine optimal policy rules from the Islamic perspective for the Iranian economy. For this purpose, a dynamic stochastic general equilibrium model, by introducing an Islamic instrument; that is, the Musharakah contract is designed. Then the impact of technology, government expenditure, oil revenue, and monetary policy shocks on the dynamics of macroeconomic variables is considered. Finally, a policy rule based on Musharakah is introduced, and optimal and empirical policy coefficients are derived. The results indicate that the magnitude of macroeconomic fluctuations in the Islamic model is smaller than the conventional. Furthermore, the speed of adjustment in the Islamic model is greater than the conventional model. The results indicate that the Musharakah rate is more effective than the interest rate in curbing the macroeconomic fluctuations. Finally, the results reveal that the optimal policy rules indicate that the minimum loss occurs when the authorities respond equally to the inflation and output gaps. While in non-optimal empirical rules, the maximum loss occurs when policy instruments respond strictly to the inflation gap.