Inflation and the islamic economy: A closed economy model
This paper attempts to answer two basic questions: First, what are the possibilities of inflation being experienced in an Islamic economy? Second, in case inflation is experienced, what are the possible remedies to fight it in an Islamic economy? The basic hypothesis of this paper is that an Islamic economy, under normal circumstances, has a set of built-in stabilizers which provide a cushion against possible fluctuations in the price level? The problem of inflation is discussed in the framework of an ideal Islamic economy as conceived by the author in section one. In section two, the various built-in stabilizers have been discussed. However, discussion of these stabilizers has been restricted to avoid digression. Section three has been devoted exclusively to a discussion of measures in case inflation appears in an Islamic economy. Admittedly, the third section has been conceived on the assumption of closed economy. The main conclusion of the paper is that “in normal circumstances, an Islamic economy is not prone to a high rate of inflation due to certain built-in stabilizers. But this docs not rule out the possibility of inflation due to factors like wars, famines, floods, earthquakes, excess of aggregate demand over potential supply due to technological innovation, unfair wage hikes and market malpractices (such as collusion to raise prices, Ihtikar, profiteering, etc.) In these circumstances, the Islamic state has a set of policy tools which can be used to stabilize the price level.” However, the paper stresses the need to instill an Islamic conscience in the people by educating them in the Shari’ah, set up appropriate monetary and fiscal institutions and establish information collecting and dissemination systems and develop an honest and sincere bureaucracy. The author advocates for testing his hypotheses against empirical evidence.