The relative efficiency of interest-free monetary system: some empirical evidence

Using cointegration and error-correction modeling, this paper empirically examines the merits of interest-free monetary system in the case of Iran and Pakistan. Results from annual data over 1960–1999 suggest that introducing interest-free banking in the two countries around the early 1980s improved, or at least did not hamper, their overall macroeconomic performance. Moreover, compared to interest-based monetary aggregates, interest-free monetary aggregates in both countries (a) exhibit a stable money velocity, (b) provide policy-makers with a highly controllable monetary environment, and (c) provide a robust linkage with ultimate policy objectives.