Preventing Oil Shock Inflation: Sustainable Development Mechanisms vs. Islamic Mechanisms

Abstract

This paper discusses the effects of both sustainable development and an Islamic system on the transmission of oil shocks into inflation. Sustainable development in this context includes wealth distribution equity, public governance effectiveness and alternative energy creation for the promotion of economic growth. These factors have been revised by Askari and Mirakhor under an Islamic approach using a set of Islamic indices to reflect a social, economic, political and ecological system that is in compliance with the Sharia principles. Using the ARDL model, we tested whether these Islamic mechanisms could have played the role of sustainable development in the fight against the transmission of oil shocks into inflation in MENA countries during the period 2000–2018. The results show that the Islamic system can play the role of sustainable development better than the traditional one, through fostering social equity, fighting against corruption, promoting humanity in employability and facilitating growth of the real economy. These Islamic values slow down the inflationary phenomenon caused by oil shocks.