Abstract
Purpose This paper aims to examine the effects of interest-free and interest-based monetary policy on inflation and unemployment rates for two groups of countries where in one group, interest-free monetary policy (IFMP) was pursued, while in the other group, interest-based monetary policy (IBMP) was followed. Design/methodology/approach This study involves a sample of 23 developed countries divided into two groups. The authors measure economic performance by misery index (MI), and MI is calculated as unemployment rate plus inflation rate. A group of countries, where MI is lower, performs better compared to the other group where MI is relatively higher. Findings The results reveal that in group of 12 countries where IFMP is adopted, the MI is lower and thus performs better compared to a group of countries where IBMP is pursued. Research limitations/implications The findings of this study have profound implications for the policymakers and government leaders who look for a solution to maintain both low inflation and unemployment rates. The findings in this study clearly portray that such ideal situations can only be achieved by pursuing IFMP. No wonder the countries which have been historically pursuing IFMP such as Japan, Switzerland, Sweden, the Netherlands and Denmark have been able to contain both inflation and unemployment rates compared to their counterparts among the English-speaking countries. Originality/value This is one of the most recent tests on the differences in economic performance between IFMP and IBMP. These results have significant value for policymakers and central bankers who have been struggling to maintain lower MI for decades.
Highlights
For over a year, Eurozone countries have pursued an interest-free monetary policy (IFMP)
This paper addresses the above three issues and establishes the relative effectiveness of IFMP compared to interest-based monetary policy (IBMP)
This study examines the effects of IFMP and IBMP on the economic performance of 23 developed capitalist countries
Summary
Eurozone countries have pursued an interest-free monetary policy (IFMP). For Group X, where a positive interest-based monetary policy (IBMP) was followed, MI is relatively higher compared to Group Y, where IFMP was pursued. IFMP or QH, when used by the CB to increase or decrease the money supply, tend to have zero financing costs, shifting the aggregate demand curve of the economy to the right and increasing both real GDP and employment. Interest-free monetary policy and its impact on the consumption function, C Consumption expenditure, C, depends positively on disposable income, Yd, where Yd = Y – T and T = To þ tY, and negatively on interest rate. The upward shift in the aef line will increase aggregate expenditure, and equilibrium income, Y and employment, E will increase, and the unemployment rate will fall. Y 1⁄4 aef or; Y 1⁄4 Ao þ bð À tÞ þ g Y þ 1⁄2vþbþe ifm or; Y À bð À tÞ þ g Y 1⁄4 Ao þ 1⁄2vþbþe ifm or; Y 1⁄4
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