The Employment Research Institute runs a range of events, including the ERI Seminar Series and the Writers' Group. Select from the links below to find out more:
The next ERI seminar:
Wednesday 30 May 2012, 12-1pm, Classroom 3/10, Craiglockhart
John Wyld, Staffordshire University Business School, Staffordshire University
Can an economy with an Islamic banking system have asset price bubbles?
This paper addresses the question: can an Islamic banking system suffer a financial crisis like the subprime mortgage market crash of 2007? Most financial crisis have three characteristics: increased asset prices, increased lending and a belief “it is different this time”. The relation between the first two factors is explored using the Allen and Gale (2003) model of asset price bubbles. Historical examples of the belief “it is different this time” will be given.
Three types of contract, musharaka, mudaraba and murabaha, will be examined in the light of Allen and Gale’s model. The intention is to assess whether asset bubbles can form under such contracts.
It is the contention of the author that the absence of interest and its replacement with a stronger element of risk-sharing in Islamic finance makes asset price bubbles harder to form, and if formed, less likely to be sustained. However, because of human nature the belief “that it is different this time” asset bubbles may form but are less likely to persist.
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