A Macroeconomic Model of an Interest-free System

Hamid Zangeneh

Abstract


A number of economic models have been designed to evaluate and
analyse the Islamic banking system. However, less attention has been
paid to macro model-building in an Islamic framework even though most of
the Keynesian, Classical, and Neo-classical economic systems are
compatible with the tenets of Islamic economics. In this paper an
interest-free economic system is formulated in terms of the familiar
Neo-classical macroeconomics models. Even though the rules of conduct
for Muslims in an Islamic economic system are different from those in
the non-Islamic economic systems, it is shown that the Islamic economic
system does exhibit properties that are consistent, reasonable, and
familiar. For example, under some reasonable simplifying assumptions,
the model shows that savings and investment do not necessarily have to
fall because of the institution of an Islamic economic system, as some
economists suggest. These depend on the rate of returu on mudarabah
investment, just as they depend on the rate of return on investment
(profits) in a credit-based economic system. These could be higher,
lower, or remain the same relative to their levels in a credit-based
economy under different conditions. The model also shows the impact of
fiscal and monetary policies on the rate of inflation, the rate of
return on mudarabah, and therefore on the investment demand. The model
shows that, in general, an economic system based on Islamic principles
is viable; it also provides unique solutions for income, employment, and
prices.

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DOI: https://doi.org/10.30541/v34i1pp.55-68

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