Download Modeling Dynamics Of Dividend Policy, Capital Structure And

MBF707: Monetary and Fiscal
Framework in Islamic Finance
COMSATS Institute of Information
Technology (Virtual Campus)
Lecture 19
FISCAL POLICY:
ISLAMIC VERSUS
CONVENTIONAL
2
Review of the Last Lecture
3
Topics Covered
Introduction
Elements of FP
Constraints
Three Sector Model
Allocation Function
Role of the Government
4
CONCLUSION





Zakat
Taxes.
Voluntary institutions, Private sector
Public sector
Equilibrium, stability and less consistency of growth.
5
Topics to Cover
INTRODUCTION (ROLE OF THE
GOVERNMENT IN ISLAM)
FISCAL POLICY (IN CONVENTIONAL
PERSPECTIVE)
WITH KEYNESIAN TEORY
IN ISLAM PERSPECTIVE
EARLY ISLAMIC PERIOD
CONCLUSION
6
Introduction
Fiscal policy is a policy to change tax and
government spending to ensure economic
stabilization.
Main purpose of fiscal policy are to:
a) achieve economic growth without
inflation and unemployment.
b) achieve equality in income
distribution in order to reduce gap
between rich and poor people.
7
Introduction- Types of FP
Automatic stabilizers
a)Progressive & Proportional Taxes
b)Price Ceiling & Price Flooring
Discretionary fiscal policy
a)Contractionary Fiscal Policy
b)Expansionary Fiscal Policy
8
Introduction- Types of FP
There are two approaches to analyze fiscal policy:
 First- the economics law governing the economy in which these
macroeconomic policies are made and pursued. It can be in two
ways:
a)
An economy governed by Shariah principles.
b)
An economy governed by civil or western law while
some aspects of Shariah principles are observed in
selected economic activities.
 The first approach has been a natural choice.
 Second-much more in research and investigation as it means
extracting information and knowledge from real economic life. In
Pakistan & Malaysia, governments have power to control zakat
collection and disbursement; In Malaysia government also controls
waqaf and faraid management.
9
The Beginning of FP
Classical economy
 Classical economic theory has always claimed that the economy is
always at full-employment.
 Guarantee that, all output produced by firms will be taken up by
consumers on the principles that, supply creates its own demand.
 In the short-run there will be temporary disequilibrium in the
capital, labor and product market, but in long run the economy is
always in equilibrium or full employment.
 The market is therefore perfect and there is no need for government
to interfere in the economy.
 However classical economy was proven wrong as the US economy
got into the Great Depression in the 1930’s. There was huge amount
of unemployment due to business shut downs and bank failures. It
clearly shows that something went wrong with the market.
10
The Beginning of FP
Keynesian economics
 In criticizing the classical economist, J.M Keynes
(1936) says that there is not enough demand in the
market.
 In his explanation of short run, it is the demand for
goods and services that will determine the level of
GDP, rather than the supply of factor inputs.
 The Great Depression was a result of low spending by
consumer and business.
 The spendings were not enough to bring back the
economy to full employment. The only way to raise
demand and GDP is increasing government spending.
11