Munich Personal RePEc Archive

Monetary Policy & Monetary Regime in an Interest Free Economy: An Alternate Approach In Monetary Economics amidst Great Recession

Shaikh, Salman (2010): Monetary Policy & Monetary Regime in an Interest Free Economy: An Alternate Approach In Monetary Economics amidst Great Recession.

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Abstract

This paper reviews limited, but precious academic literature on central banking and monetary management in Islamic finance. It discusses the building blocks of an Islamic monetary system. It discusses how savings would feature despite discontinuation of interest, how inflation will be checked with central banks not having at its disposal conventional OMO, how liquidity will be managed in banking sector when central bank wants to inject liquidity or mop up funds. How and to what extent the institution of Zakat would enable the government to meet its fiscal targets and does not crowd out private sector. How balance of payments and exchange rate stability can be managed in an interest free economy. If in the short term, the government or central bank needs alternative source of revenue other than Zakat, they can issue GDP linked bonds. This could replace T-bill and provide a base instrument for OMO and liquidity management in the banking and financial sector.

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