Istisna’a based monetary policy and its effectiveness in achieving full employment and price stability

Abstract

PurposeThis paper aims to explore Istisna’a as a tool of monetary policy (MP) and examines its effectiveness in achieving full employment income and price stability.Design/methodology/approachThis paper uses Istisna’a as a tool of MP and examines its effects on key macroeconomic variables on purely theoretical ground. The effectiveness and the impact of Istisna’a-based MP is examined by using aggregate output and aggregate expenditure model, embedded with Islamic economic principles, including zakat function.FindingsIstisna’a-based MP immediately creates well paid jobs, positively contributes and expands the size of the manufacturing sector, increases capital per person employed, labor productivity and thus increases output, employment and promotes industrialization. Increase in the size of manufacturing sector will not only increase manufactured value-added exports but also cut high valued manufactured imports and thus increases positive trade balance and eventually reduces trade deficits. Increase in labor productivity will improve the standard of living, and eventually the economy will yield sustainable high growth rates, full employment and prosperity.Originality/valueThis is probably one of the first attempt to systematically develop the Istisna’a-based MP with detailed MP transmission mechanism. This new contribution in the field of Islamic MP will unveil the horizon of sustainable economic growth, creation of well paid jobs, expansion of manufacturing sector, rapid industrialization and the increase in capital per person employed across the economy, and eventually Istisna’a-based MP will be one of the most effective tool of MP for transforming an economy into a relatively higher and sophisticated stages which will eventually promote sustainable development.