Munich Personal RePEc Archive

Can GDP growth rate be used as a benchmark instrument for Islamic monetary policy?

Uddin, Md Akther (2014): Can GDP growth rate be used as a benchmark instrument for Islamic monetary policy?

[img]
Preview
PDF
MPRA_paper_67696.pdf

Download (330kB) | Preview

Abstract

This paper discusses Islamic monetary policy which could potentially be a sustainable alternative to the conventional. Islamic banks and financial institutions have to set their benchmark based on London Interbank Offered Rate (LIBOR) which raises doubt and controversy of the uniqueness of Islamic finance. By analyzing current literature on Islamic monetary policy models it is proposed in this study that GDP growth rate adjusted for interest income and inflation can be set as a benchmark for money market instrument and reference rate for financial and capital market to set the cost of capital or rate of return. In order to test the two proposed models, one year data from 99 countries have been collected. The study uses the OLS regression and the result shows that real interest rate is not a viable instrument for monetary policy framework as no significant relationship has been found with key factors such as inflation and unemployment. On the other hand, GDP growth rate has a statistically significant relationship with inflation and unemployment, GDP growth rate is higher for OIC countries, however, unemployment rate is higher.

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.