Interest-free economy model (An analysis within the framework of the DSGE model)

The views that the mainstream paradigm has not been successful in solving conventional economic problems have become widespread. One of the alternative approaches that offer solutions to the search for the solution of economic problems is the Islamic economic and finance approach. Although the literature on Islamic economics and finance is rich enough to produce solutions to conventional economic problems, when the literature on Islamic economics is examined, it is seen that the studies are generally financially focused. Considering the literature on Islamic economics, it is accepted that economic theoretical studies are not sufficient. Islamic economics theoretically has structural dynamics that are very different from conventional economic theory. The first of these is the prohibition of interest. Building an economic model with a prohibition on interest will form an important basis for theoretical studies on Islamic economics. In this study, a model in which the interest prohibition is applied theoretically for Islamic economics is designed. In the model, profit-loss partnership (mudaraba) financing method is used as a monetary transfer tool instead of interest. Accordingly, in the model, households give their capital to companies and participate in the production process on the basis of profit-loss sharing. The study is based on dynamic stochastic general equilibrium (DSGE) analysis for the small open economy model. Türkiye's data is used for the small open economy, and US economic data is used for the foreign economy. Data for Türkiye is TÜİK data, data for the USA is FED data. The data obtained were seasonally adjusted and included in the analysis with the Bayesian estimation method. According to the results of this analysis, it is possible to construct an interest-free economy. In such an economy, real activities come to the fore and a more stable economic structure is observed. The study is important as it fills an important gap in the literature.