Islamic Monetary Economics: Insights from the Literature

This chapter reviews critical early literature of Islamic monetary economics. The prohibition of Riba has imposed challenges on Islamic economists to come up with the viable alternatives to achieve Islamic monetary policy goals. Our extensive review of theoretical and empirical literature indicates that equity based profit- and loss-sharing instruments have been proposed for conducting open market operations in an interest-free economy. Theoretically, the central bank can achieve desired goals by controlling money supply and profit-sharing ratios. The findings from empirical literature suggest that money demand tend to be more stable in an interest-free economy. Whether monetary transmission works through Islamic banking channel is controversial, but the literature is growing. These findings are not surprising as majority Muslim countries lack sustainable and equitable economic growth. Moreover, these countries suffer from higher inflation and unemployment with little or no monetary freedom due to fixed exchange rate regime, shallow financial markets and strict capital control

Futures trading, spot price volatility and market efficiency: evidence from European real estate securities futures

In 2007 futures contracts were introduced based upon the listed real estate market in Europe. Following their launch they have received increasing attention from property investors, however, few studies have considered the impact their introduction has had. This study considers two key elements. Firstly, a traditional Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model, the approach of Bessembinder & Seguin (1992) and the Gray’s (1996) Markov-switching-GARCH model are used to examine the impact of futures trading on the European real estate securities market. The results show that futures trading did not destabilize the underlying listed market. Importantly, the results also reveal that the introduction of a futures market has improved the speed and quality of information flowing to the spot market. Secondly, we assess the hedging effectiveness of the contracts using two alternative strategies (naïve and Ordinary Least Squares models). The empirical results also show that the contracts are effective hedging instruments, leading to a reduction in risk of 64 %

Exchange Rate Regime, Real Exchange Rate, Trade Flows and Foreign Direct Investments: The case of Morocco

We study the behavior of the Real Effective Exchange Rate (REER) of the dirham against the European currencies (Europe of the 15), over the period 1960-2000 (annual data). We measure the volatility using standard deviation, and the misalignments as the difference between the actual REER and the equilibrium REER (NATREX model). We show that a rise of the volatility of the dirham reduces the trade flows (exports and imports). The misalignments affect also the trade flows: an overvaluation leads to a reduction in Morocco exports from, to a raise of Morocco imports, and globally to a deterioration of the trade balance with the European Union. On the other hand, neither the volatility nor the misalignments have an effect on the direct investments (FDI) in favor of Morocco