MONETARY POLICY IS Dr Atiq ur Rehman

NONSENSE; ISLAMIC Presented at

World Islamic Economic and Finance

ALTERNATIVES MAKE SENSE Conference 2023

Minhaj University, Lahore
COMMENTARY ON CONTEMPORARY
MONETARY POLICY
The mainstream monetary economics is filled with contradictions,
logical inconsistencies, missed and messed normative implications
and data inconsistencies. 
There are heterodox theories having better match with historical
data, but the theories are often undermined and ignored.
It is in fact difficult to find something logical and valid in classical
monetary economics. Despite a clear empirical failure, monetary
economics is still widely believed which is quite surprising.
 LOGICAL INCONSISTENCIES
Any real implication of inflation on the economy comes from relative price movement.
If prices of all goods and services increase at the same rate, no real variable would be
affected
E.g. Phillips curve assumes that inflation affects employment
It happens due to differential in the changes for wages and commodity prices.
This means, focusing aggregate inflation is meaningless.
One needs to look at the relative movement of sub-indices of the consumer price index.
But the monetary policy especially the inflation targeting framework explicitly focuses
on aggregate price level without taking any care of the relative price movement.
MISSED AND MESSED
NORMATIVE IMPLICATIONS.
Assume increasing interest rate reduces inflation.
The demand for necessities cannot be reduced significantly.
Therefore, if any reduction in price level occurs, it must be driven by prices of
luxuries.
Therefore, the rise in interest rate will improve the purchasing power of consumers
of luxuries, and would be ineffective to improve the prices of necessities.
There are very obvious normative implications, which are never discussed
MISSED AND MESSED
NORMATIVE IMPLICATIONS
Assume that increase in interest rate reduces the prices.
The demand channel also implies that a higher interest rate leads to increase in
unemployment.
Therefore, the cost of price stability is loss of jobs
Those who are at the risk of losing jobs are the poorest people.
Therefore price stability comes at the cost of the most vulnerable cohort of society
IGNORING FACTS
Thomas Tooke (1773-1858) is perhaps the first person to produce a book in
monetary economics.
He is also a pioneer of the ‘Banking School theory’.
This theory predicts that higher interest rates lead to higher prices
Simple logic: the interest rate is a part of cost of production, higher cost, higher
prices
This is the oldest theory on the relationship between interest rate and inflation
Never mentioned in the economic textbooks and even top economists don’t know
about it
DENYING FACTS
Gibson (1923) finds that higher interest rate leads to higher prices
It was termed as Gibson Paradox to reflect absence of theory
Theory exists from the day 1
DATA INCONSISTENCY
The facts are often ignored in Monetary economics
After June 2021, more than120 countries increased interest rate with aim to control
inflation
The countries successful to control inflation are less than 10
This means a failure; yet it is practiced
IT’S HARMFUL
Pakistan pays 4000 billion in markup
Its not price of borrowing, its price of inflation control
Yet inflation is also out of control
It is wasting half of national budget to achieve nothing
Even flood victims are suffering and no money for them, banks get hundreds of
billion after every MPC meeting
OBJECTIVES OF MONETARY
POLICY
Growth
Employment
Price Stability
Financial Stability

All an be achieved by Salam; isn’t it?

ISLAMIC ALTERNATIVE;
SALAM
It can be used for monetary injections/ mop-ups
It can be used for inflation control
It can be used for all other objectives that monetary poliy tries to achieve
ADDITIONAL ADVANTAGES
Monetary policy works through bankers, they are primary beneficiaries
Salam would benefit the grass-root level at first
It is best alternative of interest based microfinance, even better than Qarde Hassan
If you give Qardhe Hassan for agriculture, you will get back money
Farmers have skills in production, not in marketing
This may result in default
In salam, the farmer pays you the product
That means he will use energy for production
Thank you