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Fiscal Policy In An Islamic Economy And The Role Of Zakat

Author

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  • Mohammed B. Yusoff

    (Department of Economics, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, P. O. Box 10, 50728 Kuala Lumpur, Malaysia)

Abstract

This study incorporates zakat into a simple macroeconomic model of an Islamic economy and analyzes the role of zakat in the national income determination. The reduced form aggregate consumption function suggests that the determinants of consumption are: Zakat expenditure, taxes, income and asset holdings of individuals. Zakat could be used as a counter-cyclical policy through discretionary and non-discretionary fiscal policy. Discretionary fiscal policy is carried out by varying the disbursement of zakat to the recipients. During the expansion phase of the business cycle, the government reduces zakat expenditure to close the inflationary gap. This action helps increase the zakat surplus, in the Baitul-Mal. Likewise zakat expenditure could be increased by using the zakat surplus accumulated during the boom periods, when the economy is in the down-swing to spur aggregate spending and economic activities. Therefore, zakat could complement taxation and government spending as tools of stablization policy.

Suggested Citation

  • Mohammed B. Yusoff, 2006. "Fiscal Policy In An Islamic Economy And The Role Of Zakat," IIUM Journal of Economics and Management, IIUM Journal of Economis and Management, vol. 14(2), pages 117-146, December.
    • Handle: RePEc:ije:journl:v:14:y:2006:i:2:p:117-146
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    References listed on IDEAS

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    1. Hamid Zangeneh, 1995. "A Macroeconomic Model of an Interest-free System," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 34(1), pages 55-68.
    2. F.R. Faridi, 1983. "Theory of Fiscal Policy in an Islamic State نظرية السياسة المالية في الدولة الإسلامية," Journal of Research in Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 1(1), pages 15-30, January.
    3. Munawar Iqbal & David T. Llewellyn, 2002. "Introduction," Chapters, in: Munawar Iqbal & David T. Llewellyn (ed.), Islamic Banking and Finance, chapter 1, Edward Elgar Publishing.
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    Cited by:

    1. Mohammed B Yusoff, 2012. "Zakat Distribution and Growth in the Federal Territory of Malaysia," Journal of Economics and Behavioral Studies, AMH International, vol. 4(8), pages 449-456.
    2. Habib Ahmed, 2019. "Fiscal Policy and Deficit Financing: Islamic Perspectives السياسة المالية وتمويل العجز: وجهات نظر إسلامية," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 32(1), pages 79-85, January.
    3. Rini Rini, 2020. "A Review of the Literature on Zakah between 2003 and 2019," International Journal of Economics and Financial Issues, Econjournals, vol. 10(2), pages 156-164.

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    More about this item

    Keywords

    Fiscal policy; Islamic economy; Zakat.;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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