The University of Newcastle, Australia

Associate Professor Akhtar Hossain awarded Best Paper

Newcastle Business School academic Associate Prof Akhtar Hossain has won an award for his paper discussing Islamic banking and finance.

Associate Professor Akhtar Hossain has been awarded 2014 Best Paper Award at the Foundation of Islamic Finance Conference (FIFC).

The paper, titled "Exchange-rate Regimes, Inflation Volatility and Growth of Real GDP: An Empirical Study of Nine Muslim-Majority Countries, 1970-2010", discusses the evolution of Islamic banking and finance (IBF) since its modern-era emergence in 1970. In particular, the paper highlights the importance of stability for IBF and the methods by which this can be achieved.

The paper develops a short-run macroeconomic model showing the interrelationships of real-GDP growth with inflation, real interest rates and real exchange rates and then deploys a structural vector autoregressive (SVAR) modelling approach to estimate the model and conduct innovation accounting of real output growth for individual countries and all countries as a group.

The key finding is that structural innovations in inflation, real interest rates and real exchange rates explain approximately 40-to-50 per cent of structural innovations in real-GDP growth for most individual countries in the sample. A feedback effect is present, with innovations in real-GDP growth explaining a significant proportion of innovations in inflation in some countries with large non-tradable goods sectors.

The policy implications of the paper are as follows. Islamic financial institutions can perform more efficiently under conditions of macroeconomic stability in general and price stability in particular. This can be achieved when policymakers make firm commitment to achieve the targets of sustained stability in both inflation and real-GDP growth.

Regarding price stability, authorities should establish and maintain transparency and credibility in monetary policy by implementing rule-based monetary policy. This would require introduction of some flexibility into the existing exchange-rate arrangements. Any increased degree of exchange-rate flexibility would represent an improvement, with the ideal being full currency floatation.

Finally, the ultimate success of monetary policy hinges crucially on the degree of disciplined, complementary support that the fiscal authorities provide.