Central Banking and Monetary Policy in Muslim-Majority Countries

Central Banking and Monetary Policy in Muslim-Majority Countries

Akhand Akhtar Hossain

This book reviews key aspects of central banking and monetary policy in selected Muslim-majority countries. While reviewing country-specific experiences and issues in inflation and monetary policy, and analysing them from an historical context, emphasis is given to the evolution of Islamic banking and finance and the consequent institutional developments for maintaining price stability. One recurring theme is that, although Islamic banking and finance may have created some complexities, it remains consistent with Classical monetary theory and has created opportunities for improving the infrastructure of central banks and monetary policy to maintain both price and economic stability. The introduction of Islamic banking and finance strengthens the argument for low and stable inflation and rule-based monetary policy. Monetary policy frameworks in these countries include exchange-rate pegging, monetary targeting and inflation targeting under varied restrictions on capital flows. Macroeconomic problems under these regimes are also highlighted and their policy implications drawn.

Chapter 2: Bahrain

Akhand Akhtar Hossain

Subjects: asian studies, asian economics, economics and finance, asian economics, islamic economics and finance, money and banking


Bahrain is a small country with a highly open economy. It operates under a fixed peg exchange rate system with freely mobile capital. Among the rapidly growing economies of the Middle East, Bahrain’s importance has been increasing given its long standing as a global centre for international banking and finance. Bahrain has indeed emerged as a leader in Islamic banking and finance since the late 1970s. Presently, it represents an important case study of exchange rate policy for economic stability in general and price stability in particular within a composite banking and financial system. This chapter overviews the financial system in Bahrain and examines the operation and consequences of exchange rate policy for price and real exchange rate stability. The core feature of exchange rate policy in Bahrain has been in place since the early 1980s. A fixed peg exchange rate system fixes the Bahrain dinar to the US dollar while international capital flows are deregulated, yielding perfect capital mobility. Therefore, aspects of macroeconomic performance in Bahrain can be highlighted to assess the implications of a fixed peg exchange rate system on the following key variables: the inflation rate; the real interest rate; the real exchange rate; and real output growth.

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