The effect of an interest-free banking system on level and volatility of inflation: a GARCH model

Some Muslim researchers argue that a no-interest financial system better achieves the goal of price stability. Using a GARCH model, this article examines the effect of an interest-free banking system on level and volatility of inflation in a country with a full-fledged no-interest financial system. Iran is chosen for our case study because it has initiated the most far-reaching experiments with interest-free banking in the Muslim world. The results indicate that the new financial setting in Iran has reduced inflation uncertainty but has failed to lower the level of inflation.