Is Equity Financed Budget Deficit Stable in an Interest Free Economy?

The authors in this paper provided the analysis of the stability of an equity financed budget deficit in an interest free Islamic economy. In order to do so, they have developed a small closed economy theoretical macroeconomic model broadly consistent with the Islamic tenets. The study resulted that under a strong wealth effect the instability of an equity financed deficit is not always the case, and that properly implemented fiscal policies may have positive contribution in terms of enhancing the output of the economy.