ISLAMIC ENDOGENOUS MONEY: EVIDENCE FROM ISLAMIC BANKING SYSTEM IN INDONESIA AND MALAYSIA
This paper proposesa theoretical model of endogenous Islamic money and analyses empirically the endogeneity of Islamic money supply underfiat and fractional reserve systems. The causal relations between Islamic money and macro and financial variablesare assessed using on the Autoregressive Distributed Lag (ARDL) model andthe error-correction modelling (ECM). The resultssuggest that the maturity and the bigger asset portion of Islamic financial system bring a better endogeneity of money. They also reveal that profit and loss sharing system can connect economy to money, minimize the exogenous potentials of fractional reserve requirement system, and eliminate the exogenous feature of fiat money system. Accordingly, this study argues that Islamic endogenous money system can be developed in fiat and fractional reserve banking systems.
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