Welfare Effects of Money Demand Function, An Analysis on the Basis of Islam's Family Ethical Principles

Money demand function in the conventional economics considers three transaction, precautionary and speculative motives for money demand. The reason is the instrumental rationality assumption in designing and formation of the family’s money demand function, while in Islam’s viewpoint, as the rationality of the family is beyond the instrumental one and it enters the spheres of society and ethics, such desirable moral characters as compassion and altruism will also affect the formation of family’s money demand function. In this study, with an eye to the ethical principles dominating the family in Islam’s viewpoint, we show that family formation leads to the uplift of desirable ethical characteristics, and by extending the institution of family on the basis of Islam’s value foundations, such ethical attributes as dedication, compassion and altruism will spread over the society. Thus, the money demand will not be solely based on precautionary, speculative and transaction motives, and the motives based on desirable moral characters, called forth type motives in this study, will affect it. Then, in the framework of Sidrauski’s model, we prove that because of increasing forth type motives via affecting the time-preference rate, the family effect leads to a higher welfare.