Examining the Role of Zakāt in the Impact of Economic Policies on Macroeconomic Variables in Iran: A New Keynesian Dynamic Stochastic General Equilibrium (NK DSGE) Modelling Approach

Introduction and Objectives One of the fundamental economic challenges is the instability caused by inflation, which is particularly influenced by demand and supply shocks. This economic phenomenon can severely diminish the real value of wages and assets of low−income groups relative to high−income groups. Income inequality, arising from various economic factors, can lead to class divisions and the inability of some individuals to save and participate in production through capital accumulation. In this context, taxation is recognized as a tool for economic stabilization and restoring economic variables to an equilibrium path, although it may also have negative repercussions. In Islam, Zakat (as a form of almsgiving; giving to charity or needy) is collected from hoarders who have accumulated their wealth. This reflects Islam's emphasis on economic justice, as Zakat helps reduce inequality and encourages individuals to invest and circulate wealth within the economy. Consequently, Zakat serves as a tool for enhancing economic dynamism. As one of the Islamic principles, Zakat not only reduces inequality but also encourages individuals to allocate their assets towards production and economic circulation rather than hoarding. This research aimed to examine the role of Zakat in influencing economic policies and macroeconomic variables in Iran within the framework of a Dynamic Stochastic General Equilibrium (DSGE) model. The main objectives of this study included analyzing the impact of Zakat on income distribution, investigating its effects on economic stability, and assessing its role in reducing income inequality. Given the significance of Zakat in Islam and its positive impacts on society, it is expected that the findings of this research will provide effective strategies for improving the economic situation of Iran.
Method: To analyze the data and achieve the research objectives, a Dynamic Stochastic General Equilibrium (DSGE) modeling approach was employed. This model is designed following the work of Costa and Garcia-Cintado (2018) and, due to its dynamic capabilities, allows for the examination of economic interactions and the effects of fiscal and monetary policies. DSGE aids in explaining macroeconomic phenomena such as growth and business cycles. This model investigates the interactions between households, consumers, firms, the government, and monetary authorities. Within this framework, several fundamental assumptions are considered. The first assumption pertains to zakat payments by a portion of households who fulfill their religious duty influenced by Islamic teachings. The second assumption emphasizes the voluntary nature of zakat, meaning that the transfer of zakat funds from donors to recipients occurs without government intervention, thus preventing the government from using zakat as a tool for fiscal policy. The third assumption includes the broader meaning of zakat, covering nine categories, including Zakat al−fit̑r, Khūms, expiation, and charity. The fourth assumption designs the model based on the less popular theory among scholars, which includes more cases than the widely accepted theory. The fifth assumption considers an average zakat rate of 2.5%, with two scenarios of 5% and 10% introduced into the model for comparative analysis of their effects on consumption and the economy. This research aimed to examine the impact of zakat on macroeconomic variables and consumption behavior in the Iranian economy. The results are expected to contribute to a better understanding of the role of zakat in economic stabilization and provide effective strategies for improving the country's economic situation.
Results: To evaluate the success of the proposed model, the degree of compatibility and proximity of the moments produced from the model calibration with the moments of the real world will be utilized. This process allows researchers to simulate the time series of variables using the estimated parameters. The closer the simulated moments are to the real moments, the greater the success of the model. In this research, the effects of various shocks on key economic variables are examined. The effects of productivity shocks indicate that a shock of one standard deviation (1%) leads to an increase in the marginal productivity of labor and capital, resulting in increased production. Households in the target group of zakat donors increase their labor supply, while their consumption decreases, whereas zakat recipients increase their consumption. The effects of government expenditure shocks also indicate that a one-standard-deviation shock increases aggregate demand and exerts pressure on price levels, leading to a decrease in consumption among both zakat donors and recipients. The effects of monetary shocks show that an increase in monetary shocks decreases demand for government bonds and subsequently increases private investment. These changes have different impacts on household consumption. Ultimately, the analysis of productivity, monetary, and government expenditure shocks with changes in various parameters indicates that zakat payments can absorb these shocks and smooth consumption fluctuations in the Iranian economy.
Discussion and Conclusions: This research investigated the role of zakat in influencing economic policies on macroeconomic variables in Iran. The designed model includes two communities: zakat donors and zakat recipients each subdivided into various subgroups. This model considers three main shocks: total factor productivity, monetary, and government expenditure shocks. After determining the appropriate model, the optimization conditions of the agents active in the economy are analyzed, and the nonlinear model is transformed into a log−linear form. The results indicate that in the event of a productivity shock, tax revenues increase; leading to an increase in consumption for the target group of zakat recipients, while consumption for the target group of zakat donors decreases. In response to monetary shocks, zakat−donor households increase their consumption, while zakat−receiving households initially decrease and then increase their consumption. Additionally, with government expenditure shocks, demand for goods decreases. The research also shows that as the share of consumption by zakat donors from total consumption increases, the consumption volatility of the zakat recipient target group becomes greater in response to shocks. This indicates the positive impact of zakat on income distribution and the reduction of class disparities. Overall, zakat acts as a tool for economic stabilization and can smooth consumption fluctuations. These findings emphasize that zakat not only helps reduce poverty but also contributes to strengthening economic stability.
Acknowledgment: The authors of this article express their gratitude to the anonymous referees for their valuable comments, which significantly contributed to the improvement of our work.
Conflict of Interests: The authors declare no conflicts of interest related to the content of this article.
JEL Classifications: E63, C61, E21, Z12