Inflation Behavior in Top Sukuk Issuing Countries: Using a Bayesian Log-linear Model

This paper focused on developing a model to study the effect of sukuk issuance on the inflation rate in top sukuk issuing Islamic economies at 2014ý. ýFor this purposeý, ýas the available sample size is smallý, ýa Bayesian approach to regression model is used which contains key supply and demand side factors in addition to the outstanding sukuk volume as potential determinants of inflation rateý. ýIn the suggested modelý, ýinflation rate variable shows an apparent right skewness and the efficiency of log transformation for this variable is confirmed via Box-Cox approachý. ýTo give Bayesian estimators of the regression parametersý, ýwe have implemented an MCMC approach including 100,000 iterations in the WinBUGS softwareý. ýThe results show that sukuk volume is a significant determinant of inflation in selected Islamic countriesý, ýbut only in ýthe ýwell-ýdevelopedý capital market economies its increase could decline the rate of inflation and so sukuk could be used as a ýýýpolicy instrument for controlling inflationý. ýAlso the Bayesian estimation of the other parameters shows that increase of money growth and exchange rate growth lead to higher inflation ratesý. ý