| Author(s) | Yousef A. Al-ZamelYousef A. Al-ZamelYousef A. Al-Zamel |
| Affiliation | Associate Professor, Department of Economics, College of Administrative Sciences, King Saud University, Riyadh, Saudi Arabia |
| Title | Towards a Money Demand Model for an Islamic Economy: |
| Source | Journal of King Saud University. Administrative Sciences. Volume 19, No 2. (2007/1427) |
| Abstract | This paper is an endeavor towards building a well behaving money demand model for a country or a group of countries in the developing Arab and Muslim worlds in order to engineer a successful framework of monetary policies that enhance goals of growth and development. Towards realizing this goal, this study contributes theoretical and empirical analyses of a dual money demand model that employ both profit-sharing rate as well as interest rate to comply with the modus operandi of the very dual economies of these countries. The purpose of this research is fourfold: First, it constructs a suitable theoretical and econometrical money demand model for an Islamic economy. Second, such an Islamic money demand model would help to show the basic Islamic model’s features, mechanism and its results for the GCC and similar Muslim expected general countries, whenever they tend to manipulate Islamic values in their economic systems. Third, the model would be estimated using available data for some GCC and some selected Arab and Muslim countries in order to suggest an estimated Islamic econometric model that could be employed by conceding studies to evaluate options of alternative monetary policies that best serve stabilization and meanwhile motivate growth. Fourth, since Muslim countries are exposed to modernization through westernization, the estimation of the model would help to determine the strength of such expose. In paradox to papers on Islamic economics and finance that strively tried to find Islamic financial articulates that completely represent interest rate in its role and results, this study tries to select a financial real world article that substitutes interest rate, and meanwhile embodies Islamic values (rate of profit sharing for financial capital). The estimation procedure, manipulated by this study is the “log difference error correction methodology” in order to restore any possible loose of long–term information due to cointegrated variables. Estimation of the model was performed on annual data for a period up to 30 years from 1967 in relevance to both individual country and pooling groups of different income-classes. The empirical results of the model show that they are significant stable and correspond very well to the theoretical expectations. GDP variables show mostly the significant and expected positive sign. When comparing the strength of the relation of GDP to money demand in our study with that of the industrialized western countries, we find that GDP plays a much higher role in explaining the money demand behavior in Muslim countries; due to their organic economies that has not yet been extensively influenced by the western modernization surge. The results of the estimated coffecients of the rate of return on financial capital for the general group (14 countries), the mid-income group (4 countries), show significant confidence with the positive expected sign. Although significance of interest rate improve considerably in our model when profit variable is included, the interest rate variable show paradoxical positions in its sign (+,-) and significance. Consequently, it is imperative for such developing Muslim countries to enhance and encourage the on-going efforts of some private financial segments in areas of research, engineering, and operation of Islamic financial derivatives and stocks. Such continuous efforts towards developing Islamic financial derivatives, articles, and institutions could be the best avenue toward the development of effective, pragmatical, and functional financial markets that best suit requirements of Muslim savers and investors and therefore enhance from within totalitarian, perpetual and genuine development. |
