The behavior of the Taylor rule in the presence of sovereign Sukuks based on the growth rate of the economy: An analysis by DSGE modelling

  • 515 Views
  • 215 Downloads

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License

The aim of this paper is to study the behavior of the Taylor rule in the presence of Sukuks. The New Keynesian model of Gali (2008)/Chapter 3 is used, due to its simplicity and small size. Nevertheless, such a model is suitable for examining the implications of monetary policy in the presence of sovereign Sukuks. The growth rate is used as the rate of return on sovereign Sukuks, which is closest to the profit and loss sharing approach, and is compared to the Gali’s baseline model. The results show that the introduction of sovereign Sukuks mitigates inflation and output gap shocks, but also limits the scope of the Taylor rule. Thus, an increase in the interest rate is offset by a flight of capital from sovereign Sukuks to treasury bonds, while a decrease in the interest rate leads to a flight from treasury bonds to sovereign Sukuks. In the extreme, if the preference for Sukuks is largely dominant, the Taylor rule tends to be obsolete, and vice versa.

view full abstract hide full abstract
    • Figure 1. Effects of a monetary policy shock
    • Figure 2. Effects of a technology shock
    • Table 1. Calibration of the model parameters
    • Conceptualization
      Mustapha Ziky, Nabil El Hamidi
    • Data curation
      Mustapha Ziky, Nabil El Hamidi
    • Formal Analysis
      Mustapha Ziky, Nabil El Hamidi
    • Funding acquisition
      Mustapha Ziky, Nabil El Hamidi
    • Investigation
      Mustapha Ziky, Nabil El Hamidi
    • Methodology
      Mustapha Ziky, Nabil El Hamidi
    • Project administration
      Mustapha Ziky, Nabil El Hamidi
    • Resources
      Mustapha Ziky, Nabil El Hamidi
    • Software
      Mustapha Ziky, Nabil El Hamidi
    • Supervision
      Mustapha Ziky, Nabil El Hamidi
    • Validation
      Mustapha Ziky, Nabil El Hamidi
    • Visualization
      Mustapha Ziky, Nabil El Hamidi
    • Writing – original draft
      Mustapha Ziky, Nabil El Hamidi
    • Writing – review & editing
      Mustapha Ziky, Nabil El Hamidi