Toward designing a Dynamic Stochastic General Equilibrium Model in an Islamic framework

The aim of this paper is the determination of an optimal policy rule for Iranian economy from an Islamic perspective. This study draws on an Islamic instrument known as the Musharakah contracts to design a dynamic stochastic general equilibrium model. Then the impact of macroeconomic shocks on the Dynamics of Macroeconomic variables are considered. Finally a policy rule based on Musharakah is introduced and the optimal policy and empirical coefficients are derived. The impulse respond functions reveal that first, the magnitude and persistence of the shocks are different in Islamic and conventional models. Second, the convergence time in Islamic model is shorter than the conventional model, and finally the magnitude of fluctuations of macroeconomic variables in Islamic model is smaller than the conventional model. Morover,the results show that ,The optimal policy is obtain from a flexible policy rules, when the authorities respond equally to the inflation and output gaps. The results indicate that the new policy rule introduced in this paper can be an appropriate substitute for Tailor Rule in conventional models.