A dynamic investment model with profit-sharing in an interest-free economy: methodological issues

An integrated macroeconomic model of an Islamic economy may be developed using the framework of an investment model. An Islamic ethical-value system and profit-sharing contracts can guide investment behavior. The typical firm's investment decision emerges from a dynamic inter-temporal maximization exercise over an infinite time horizon. Application of calculus can help one to arrive at the optimal investment/employment criteria for a firm. Subsequently, the results are incorporated into a macroeconomic model to study the behavior of key endogenous variables such as national income and rate of profit-sharing. Comparative statistics, within the general-equilibrium framework, reveal the potency of monetary policy and the neutrality of fiscal policy with regard to output and employment. The model has both classical and Keynesian elements. Discretionary policy options are restricted by the need for non-inflationary growth.