J.KAU: Islamic Econ., Vol. 19, No. 2, pp: 3-20 (2006 A.D./1427 A.H.)

Monetary Dynamics and Gold Dinar: An Empirical Perspective
MANSOR H. IBRAHIM* Professor of Economics International Islamic University Malaysia, Malaysia E-mail: mansorhi@iiu.edu.my.
ABSTRACT. According to proponents of Gold Dinar particularly Meera and Aziz (2002), termed as Dinarists’, the fiat monetary system is inherently unstable. In providing an empirical perspective on this contention, this paper investigates monetary dynamics of a Muslim economy, Malaysia. To this end, the paper adopts a vector autoregressive (VAR) framework to document dynamic interactions between money supply and various macroeconomic variables including real output, price level, interest rate and stock prices. The results seem to provide some support for the Dinarists’ contention. First, the results portray clearly an important causal role of money supply for other macroeconomic variables. Second, we document some evidence that expansion in money supply is inflationary. Lastly, money supply – interest rate and money supply – stock price interactions are destabilizing. More importantly, expansion in money supply has the potential of breeding asset price bubbles. However, apart from the above findings, we also find that money supply reacts positively to increase in real output. Since the accommodative role of money supply is necessary or a pre-condition for expansion in production, arguments for Gold Dinar need to be qualified. Moreover, the viability of Gold Dinar comes into question when political and international aspects of monetary standards are considered.

1. Introduction
The recurring currency and financial problems, with the 1997 Asian and 1998 Russian crises as latest examples, have spurred enormous interest among economists and policymakers on the subject of monetary standards, especially the Gold standard