Inflation in muslim countries: Implications for an islamic economy
In this paper, inflation is seen as a phenomenon caused by excessive growth of money supply. The paper maintains that this is in conformity with the quantity theory of money which explains inflation better than any other theory. It is therefore argued that “the trade unions, traders, smugglers, corporations, scarcity of agricultural goods, price of oil, etc. are not responsible for inflation. Neither cost-push nor demand pull descriptions of the process of inflation explain the aeteology of inflation. Prices of goods are affected by the demand for goods, and goods cannot be demanded without money, and money is acquired by the people by contributing to output. Thus there is the flow of supply of goods parallel to the flow of demand for goods, so that the general price level can not rise, though prices of some particular goods may rise while the prices of some other goods may fall. It then follows that people cannot produce inflation, because they cannot have money except by producing goods. It is only the government and the Central Bank that have free access to money by simply printing it without having to contribute to total output. Seen in this light, inflation is the result of the government’s attempt to invest more than the available savings warrant”. To support this hypothesis, the paper made an attempt to enquire into the inflation-phenomena experienced in 10 Muslim countries. Data on high-powered money, money supply, quasi-money, credit creation, deficit finance, foreign exchange reserves, borrowings by the banks from the Central Bank, price index, national income, imports, etc. pertaining to the economies of Saudi Arabia (1966 to 1973). Egypt (1961 to 1974), Syria (1961 to 1974) and Malaysia (1961 to 1974) have been obtained from International Financial Statistics. These data were fed to the computer and various linear regression models were tried to support the hypothesis of the paper.