Stabilization and growth in an open Islamic economy

A broad equilibrium model may be used to look at investment and external balance in an Islamic economic framework. Monetary policy can influence output in an open Islamic economy. The central bank monitors the supply of reserves and holds or sells its bank equity shares. A rise in the supply of bank reserves decreases deposit rates. If currency and foreign wealth are held in place of domestic bank deposits, monetary expansion will still not be totally thwarted because the currency and foreign holdings do not serve as perfect substitutes for domestic bank deposits. In an Islamic economy, both savings and investment will probably go up. This leaves the effect on the current account unclear. It is likely that the returns from productive investments will be minimally adequate to cover the debt of associated loans. Because people hold equities in Islamic economies, changes in macroeconomic factors produce less pronounced effects than they do in conventional systems.