Examination of Monetary and Fiscal Policies in the Islamic Economic System with a System Dynamics Approach

Abstract

The aim of this research is to examine monetary and fiscal policies within Islamic economics, utilizing system dynamics to analyze the pathways through which money supply, government revenues, and government expenditures influence the economy. This method employs causal relationships to enhance the understanding of how fiscal and monetary policies operate in an Islamic economic framework. Findings in the area of monetary policy indicate that its impact is mediated through variables such as investment, consumption, and exchange rates. Furthermore, in Islamic economics, the government can utilize fixed and variable profit rates instead of interest rates. In terms of fiscal policy, results show that Islamic governments tend to face lower budget deficits due to the existence of various revenue sources beyond taxation. Additionally, through the application of fiscal policies in Islamic economics, the government can also control inflation within society.