Inflation targeting for monetary policy in Islamic central banking

The theory and experience of monetary policy is moving towards inflation targeting as most of the central banks are employing this pattern of policy decision. Considering the significance of using this pattern by the Central Bank of the Islamic Republic of Iran in future, the present paper tries to analyze such a monetary policy framework and discuss it from the Islamic viewpoint. The main question of this research is “Is it possible to use the new model of inflation targeting within the framework of Islamic jurisprudence and the interest-free banking operation?”. Findings, obtained through the analytical-descriptive method and jurisprudence analyses, demonstrate that inflation targeting aims to control inflation which is not only prohibited in Islam but also Islamic sources can be used to approve it. Therefore, inflation targeting for monetary policy is compatible with Islamic jurisprudence and interest-free banking operation. Notwithstanding, the use of such a pattern is conditioned on the admission of pre-conditions such as the legitimacy of the money market and the governance of market rates in an Islamic framework. Also, many of the tools and executive methods used in the conventional central banking for inflation targeting have been developed based on interest loan contract, which is incompatible with Islam.