CURRENCY SYSTEM AND IT'S IMPACT ON ECONOMIC STABILITY

Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Volume 9 (2), July 2017 P-ISSN: 2087-135X; E-ISSN: 2407-8654 Page 289 - 310 CURRENCY SYSTEM AND IT’S IMPACT ON ECONOMIC STABILITY Desmadi Saharuddin1, Ali Rama2 Abstract. Currency System And It’s Impact On Economic Stability. A number of economic problems that occurred during the power of Mamluk (1250-1517 AD) was considered as a result of the change to currency system, namely from the system of commodity-based money (gold and silver) into paper-based money (iat). Instability prices, decrease of trading activities, high of unemployment number were a number of economic indicators that occurred at that time. his issue of macro-economy was considered as a result of changes in the money system. his study analyzes the dynamic relationship between the price of gold as a representation of commodity money system and M2 as a representation of iat money against the stability of economic indicators such as inlation, economic growth, stock prices, and unemployment and interest rates. his study found that both systems not vary signiicantly against each other in its inluence on macroeconomic variables. It means that the two systems do not have contrast distinction. Indeed, it was found that the commodity-based money system is not free of inlation, as propagated by the supporters of the dinar and dirham (dinarist). Keywords: currency system, economic stability, vector auto-regression Abstrak Sistem Nilai Tukar dan Dampaknya Terhadap Stabilitas Ekonomi. Sejumlah persoalan ekonomi yang terjadi pada masa kekuasaan Mamluk (12501517 M) ditengarai sebagai akibat dari pergantian sistem mata uang, yaitu dari sistem uang berbasis komoditas (emas dan perak) menjadi uang berbasis iat (fulus). Tingkat harga-harga cenderung tidak stabil, aktivitas perdagangan melambat, pengagguran semakin meningkat adalah sejumlah indikator perekonomian yang terjadi pada saat itu. Persoalan makro ekonomian ini ditengarai akibat perubahan sistem uang tersebut. Penelitian ini menganalisis hubungan dinamis antara harga emas sebagai representasi dari sistem uang komoditas dan M2 sebagai representasi uang iat terhadap stabilitas indikator ekonomi seperti tingkat inlasi, pertumbuhan ekonomi, harga saham, tingkat pengangguran dan tingkat suku bunga. Penelitian ini menemukan bahwa kedua sistem tersebut tidak memiliki perbedaan yang mencolok satu sama lain dalam pengaruhnya terhadap variabel makro ekonomi. Artinya kedua sistem tersebut tidak memiliki distingsi yang saling kontras. Bahkan justru ditemukan bahwa sistem uang berbasis komoditas tidak bebas inlasi sebagaimana dipropagandakan oleh para pendukung dinar dan dirham (dinarist). Kata kunci: sistem nilai tukar, stabilitas ekonomi, vector auto-regression Received: January 29, 2017; Revised: April 25, 2017; Accepted: May 5, 2017 State Islamic University (UIN) Syarif Hidayatullah Jakarta. Jl. Ir. H. Juanda No. 95, South Tangerang E-mail: 1desmadi.saharuddin@uinjkt.ac.id; 2ali.rama@uinjkt.ac.id http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 290 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 9 (2), July 2017 Introduction he Mamluk dynasty, who ruled in Egypt, Syria, and Hijaz from 1250 to 1517 AD, kept a lot of historical records about currency system. he historical record on this subject appeared in al-Maqrizi various reviews (1366-1441 / 766845) in his various books such as Ighasah al-Ummah bi Kashi al-Gummah, al-Suluk li Ma’rifati Duwal al-Muluk, and al -Mawa’iz wa al-I’tibar. All of those various notes have become important references for the experts today. he fundamental problem in currency system during the Mamluk reign was the inlation in various sectors of economy. Inlation included the increase of prices of staple food, the increase of production costs, the increase of transportation costs, and so forth. his prices increase has resulted in hunger everywhere, even caused many people death (AlMaqrizi, 1997). his situation showed that inlation in the era of Mamluk was very severe. he severity exceeded inlation in Asia in 1997-1998, wherein the public at that time faced the price increases that go beyond reasonable limits, but did not caused people death. he problem of inlation in the era of Mamluk had gained enormous highlight from the experts due to this issue become a measure of the weakness of currency system at that time. Experts provide important notes that the inlation problem is characterized by the dominance of money currency, wherein the currency which made of copper has been overused. It supposed only to be used for small transactions afterwards the situation has changed drastically. Sanusi (2001) said that the sharia has placed gold and silver in a prominent position in its monetary system. he excessive use of money currency has resulted in a shift in the use of currency of dinar and dirham currency to money currency. his situation illustrates that bad currency had controlled good currency, which speciically called as bad money drives out good money. Söderberg (2004) in a study entitled Prices in the Medieval Near East and Europe corroborate the existence of these events. He argued that the prices, which depend on dinar and dirham in medieval always lared up and often experience uncertainty. he uncertainty has made new power gap in money currency. However, the fall of currency system in the reign of Mamluk was still questionable whether it simply because of intention in the system of administration, or because of natural changes in the availability of raw materials currencies. Allouche (1994) in a study entitled Mamluk Economics: A Study and Translation of Al-Maqrizi’s Ighathah replied that the issue was a deliberate action that has been done in monetary administration during Mamluk reign. here were three forms of intentional actions which Allouche conclude interrelated, the irst was the malignance in government administration (al-khaththath al-sulthaniyyah region) and bribery in the appointment of public oice (al-manashib bi al-risywah), such as in ministerial position, judges http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 Desmadi Saharuddin: Currency System and Its Impact on Economic Stability 291 position, governor position, muhtasib position, and others, in which is not possible for a person to get important position except with money. his bribery behavior resulted in corrupt mentality of the oicials, which only utilizes the state afairs for private interests. And then arouse the policy forms that were not oriented to the interests of public and the development of broader economy. As a result, the state expenditures became overused and not balanced with the ability of state budgeting. he second was the excessive of tax increases (ghala ‘al-awthan). his happened because the government aware that the income of the state was very small. his tax increase was extremely forced so that it troubled public which the majority was farmers. his fairly high increase in taxes caused the higher price of agricultural inputs, including the cost of land rental. Farmers were getting more sufered they refused to do the production. hey chose to leave their homes, and did not want to growing crops anymore.he third was the increase of money currency circulation (riwaj al-fulus). he policy of money currency determination as the main currency was based on the will of oicials who wanted to spend state money for personal and group interests. his is very possible to carry on due to the money currency was made of copper which very easy to made (Al-Maqrizi, 1956). his massive money printing has resulted in the luctuation of inlation during Mamluk reign. herefore, the amount of excess money in means that the exceed of production of goods and services has led to an increase in prices or usually referred as inlation. hree points of Allouche (1994) reviews was based on the indings of testimonies written by al-Maqrizi (1366-1441/766-845). Based on these three reviews, Allouche (1994) concluded that the change in currency system in the era of Mamluk, from dinar and dirham to money currency, was caused by the government deliberately printing money excessively. However, in a variety of data seems that the change in the currency system was not solely caused by the intention of Mamluk government monetary administration, but also caused by the limited amount of supplies of gold and silver. he limited number of gold and silver is hampering the printing of dinar and dirham currency, so it cannot balance the need for transactionbased on dinar and dirham. hus, the change of currency system during that era was caused by the factor of limitation or inability supply of dinar and dirham to balance the needs of transaction. his became the lawless of currency system based on commodity such as gold and silver for some people (Dipraja, 2011). he indication of this matter may be seen in three things among others: First, the dinar is often not used as a benchmark measurement of the price. It is characterized by the low volume usage of dinar currency when compared to dirham. Even the use volume of dinar currency is much lower than dirham. Second, the content of dinar and dirham are always changing (Al-Maqrizi, 1997). From year http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 292 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 9 (2), July 2017 to year the content of gold and silver in the precious metal is always decreased. hird, the printing of money currency was often done by Mamluk government in order to accelerate the fulillment of public transaction (Al-Maqrizi, 1997). his government’s actions further strengthen the indication of limited amount of gold and silver at that time. Such Data may be seen in the writings of the thinkers and historian who lived in Egypt in the 13th century to 15 AD. If the existence of indications proved is true, then it may change the position of theory which says that the change in the currency system in the era of Mamluk, namely from the dinar and dirham to money currency, was caused by the intention of monetary administration of Mamluk reign to fulill the ambitions of political and economic elites ruling the empire. hen such theory became weaker and cannot be used as opinion suppport. At the same time it may also reconstruct a view of the change in currency system power Mamluk era to the conclusion that changes in the currency system in the era of Mamluk, the currency of dinar and dirham to money currency, due to the limited amount of gold and silver (Hasan, 1999). Copper currency as money was an option in the middle of such limitations. hus, if these assumptions proved to be true, then the dominance of copper currency money became a relection of Mamluk government compulsion, as a result of the impossibility of running an ideal currency system. Based on the above reviews that described about the history of currency system changed at the time of Mamluk from dinar and dirham currency system to money currency system, the study clasiied two currency syestems. he irst type of currency in this study is referred to commodity-based currencies (gold and silver) and the second type of the currency is called iat currency (currency printed and endorsed by the government). his study did not focus on the study of the change of currency system during that time but try to contextualize the concepts and assumptions in the present time, namely how the impact of the use of both currency system, whether the currency of commodity-based or cash-based iat and how it impacts macroeconomic stability. hus, this study will use a number of macroeconomic variables as the indicators of economy stability. Indonesia is presented as a case study in this research. Literature Review Monetary heory: Commodity Money Vs Fiat Money Money is a means of payment which currently use for all buying and selling transactions, either directly or indirectly. he existence of money provides an alternative transaction which is easier than barter which ineicient and not suitable to use in modern times as it is today due to a consideration that the exchange rate is not balanced. he eiciency gained by using money as a means of payment will ultimately http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 Desmadi Saharuddin: Currency System and Its Impact on Economic Stability 293 boost the trade and the division of labor which would then increase the productivity and prosperity. Monetary theory relatively associated with money quantity theory of those who think that lots of factors which afect the value of money is money supply (quantity of money or the supply of money). he theory of money value discusses the inancial issues related to money value. Value of money becomes the attention of the economists, due to the high or low of money value afects the economic activity. his is evidenced by there are many theories of money delivered by some experts. According to the group of Dinarist, there is a causal relationship of money supply on the price level. his is similar to the monetarist argument that the inlation is a monetary phenomenon. he continuous increase in the money supply will lead to a decline in interest rates after the full-employment level of output is achieved. Furthermore during the interest rate remains positive, the money supply will continue to increase, in their environment, by default setting (Ibrahim, 2006). he decline in interest rates will increase the bank lending activity. When bank loans increased, so did that happen to the money supply? he increase in money supply illustrates the decline in interest rates (Judisseno, 2005). hus, this leads to a further expansion of the money supply. his clearly shows the reverse low of causality of the interest rate on the money supply. Because the price of all items controlled, the increasing of money supply will lead to asset price bubbles as written in (c), which is the second source of instability (Insukindro, 1992). Based on the above three causal relationships, Ibrahim (2006) then reiterated that the Dinarist group view that luctuations in the money supply as the main cause luctuations for other variables. Fluctuations in variables such as real output (mainly the decrease), the level of prices, interest rates and asset prices are taken into account in almost all parts of variation in the money supply, made the money supply into the core variables as a determinant of other variables change. On the other hand, many empirical studies have been done to show how the money supply afects macroeconomic variables. In Rama’ research (2013), he argued that the West African Monetary Agency WAMA (2009) on its research by using basic statistical analysis of historical data for period 2002 to 2009 showed that the percentage increase in money supply is higher than the GDP growth rate. Moreover, in these studies it appears that the velocity of circulation of money declined in most countries during the study period. Relatively high rates of growth of liquidity and declining turnover showed an excess of liquidity in most economies, especially, in Gambia, Ghana, Guinea, Nigeria, Sierra Leone and Liberia. In addition, the growth in money supply has the efect of inlation in most countries, especially in Gambia and Guinea where the impact is so signiicant and moderate efect in Benin, Guinea Bissau, Mali, Ghana, Cape Verde and Liberia. http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 294 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 9 (2), July 2017 Other studies on the relationship between money supply and macroeconomic variables were conducted by Ibrahim (2006). He examines the dynamics of Malaysia monetary in applied vector autoregressive (VAR) approach which preceded by a unit root and Co integration Test. He found that it clearly there is an important causal role of the money supply to other macro-economic variables. Money supply plays a causal role that is signiicant for other variables, including luctuations in real output, the level of prices, interest rates and stock prices. While the test impulse response functions provide some evidence that monetary expansion is the cause of inlation. Finally he concluded that the concern of dinaris group about instability efects in the money supply is empirically proven. Viewed from the impact it was so great for the economy and other macro-economic variables, as a description of the failure of paper money (iat money) which is very fragile because it did not propped up or supported on value commodities such as gold and silver. Paper money only supported by the laws that made by the government of a country. If the political and economic situation of the country is not stable, then the level of conidence in the currency will also decrease. he owners of money will be hilarious switch to another currency or commodities which considered more valued that makes the value of the currency slumped. It is the time we shall get back to the money syste, which has a standard or support of the value such as gold and silver. he use of money which supported on a commodity value of money will make it more valuable and not easily afected by inlation because it has a ixed standard of value. It means that by the resistance of commodity currencies (commodity money) against the inlation is expected to make the economy grow better and provide a positive efect on other macroeconomic variables. his study analyzes the dynamic relationship between the price of gold as a proxy of the currency system based on commodities and M2 (amount of money supply) as a proxy of the system of iat currencies with a number of macroeconomic indicators, such as inlation rate, economic growth, stock prices, unemployment and level of interest rate. his dynamic relationship will indicate whether the currency system has a dynamic efect on a number of macroeconomic variables. hus, it can be concluded that the system of particular currency may afect macroeconomic stability. Method his study analyzes the dynamic relationship between gold price (Ln gold) and M2 (Ln Fiat) against the level of inlation, the level of production, stock prices, unemployment rates and interest rates. Details of the research methodology used in this study are as follows: http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 Desmadi Saharuddin: Currency System and Its Impact on Economic Stability 295 his research is a quantitative research using a dynamic model, i.e. VAR to see the dynamic relationship between variables in the system. Type of data used is secondary data obtained from periodical publications of related institutions. his type of data is time series with monthly data from 2006 to 2014. Types of data that are used to achieve the objectives of this research are gold price (Ln gold), M2 (Ln Fiat), the level of inlation (inlation), stock prices (Ln Shares), unemployment rates (unemployment) and interest rates (interest). Variable of stock prices is used as a proxy of commodity-based currency system. It is used because data of gold-based money cannot be found speciically the amount of gold used as a transaction in the economy. his variable data is obtained from the publication of gold price that is published in oicial in real time on the website of Antam. While M2 or the money supply in the economy is used as a proxy of the iat money system (fulus). his variable data is obtained from the oicial website published by Bank of Indonesia periodically. Furthermore, variables of inlation rate, production, stock prices, unemployment rates and interest rate become a representation of macroeconomic conditions. he dynamics of a number of macroeconomic variables are correlated with the gold price and the money supply. Variable of the inlation rate is obtained from oicial publication on the website of Bank of Indonesia periodically. While variable of the production is represented by industrial production index which data is taken from the website of Central Bureau of Statistics (BPS).Furthermore, the stock price as a representation of the company performance is obtained from publication data of yahoo inance.co.id. he data of unemployment rate as a proxy of social issues is taken from a monthly report issued by the Central Bureau of statistics (BPS) on its oicial website. Furthermore, the interest rate is the average of loan interest with 3 months tenor taken from publications issued by Bank of Indonesia on its oicial website. his research uses vector auto regression (VAR) to see the dynamic relationships between the variables in the system. In addition, the study also uses the correlation analysis and Granger Causality to see the relationships between variables in the system. he main requirement in the analysis of VAR is to pass the stationarity data test to see whether there is a problem of unit root. hen, the co-integration test is done to see the long-term relationships between variables. herefore, unit root test and co-integration test are conducted irst in this data. Result and Discussion his study wants to see how the dynamic relationship between gold prices as a representation of the assumption of commodity-based money with a number of macroeconomic variables such as economic growth, inlation, stock prices, interest http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 9 (2), July 2017 296 rates and unemployment rates. Dynamic relationship patterns will show how variation of gold prices has an impact on the stability of macroeconomic variables. On the other hand, the study also compares the results of the dynamic relationship between the money supply (M2) as a representation of the iat money (fulus money in Mamluk era) against a number of macroeconomic variables. his comparison gives pictures between two systems of these currencies, whether commodity-based money (gold) or iat money (M2) gives efect to the dynamics of macroeconomic variables, such as economic growth, inlation, unemployment rates, interest rates, and stock prices. his study uses secondary data with monthly time series from 2006 - 2014. A number of econometric analysis tool used to ind the dynamic relationships between variables in the system. he root units and co-integration test will be performed irst to notice any problems of the unit root and long-term relationships between the variables in the system. he irst step in the formation of VAR model is doing a stationarity data test. According to Widarjono (2009), if data is stationary at the level, then it will use usual VAR models (unrestricted VAR). Conversely, if the data is not stationary at level but stationary at the level of diferentiation, then it must test whether the data has a long term relationship or not by using a co-integration test. When there is co-integration on the model, the model used is Vector Error Correction Models (VECM). Stationarity data test uses unit root of Augmented Dickey-Fuller (ADF) and Phillip-Perron (PP). Table 1. he Result of Unit Root Test Level Fist Diference Variables ADF PP ADF PP LnGold -0.02152 -0.07356 -9.22734* -9.22708* LnFiat -5.08950* -5.13186* -10.21611* -16.55801* Inlation -2.88655 -2.33487 -8.09380* -8.09380* LnOutput -2.99188 -2.99188 -11.70400* -11.92543* LnStock -2.41752 -2.28963 -7.32170* -7.32397* Interest -2.64452 -1.85607 -4.58954* -4.59258* Unemployment -0.41274 -0.32399 -6.82508* -7.08505* Note: *, **, ** signiicant at each critical value of MacKinnon 1%, 5% and 10%. ADF and PP test are based on trend and intercept. http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 Desmadi Saharuddin: Currency System and Its Impact on Economic Stability 297 he VAR method requires all variables in the systems for stationary. herefore, the stationarity test should be done in advance on each variable. Unit root test is conducted to determine time series of stationarity data. Time series data is said to be stationer if average, variant and co-variant at every lag is the same in any time. If the time series data does not meet these criteria then the data is not stationary (Widarjono, 2009). If the time series data has a unit root then the data moves randomly (random walk) and data that is random walk is said to be not stationary. To know time series of stationarity data there is used Augmented DickeyFuller (ADF) and Phillips-Perron (PP) test against all variables, i.e. gold price (Ln Gold), iat money (Ln Fiat), Inlation, economic growth (Ln Output), stock prices (Ln Shares), unemployment rates (Unemployment) and interest rates (Interest). Table 1 presents the results of ADF and PP test on the level and irst diference over each variable in the system. Based on the ADF and PP unit root test, it shows that there is 1 variable that is stationary on the level while other variables are not stationary at level. herefore, all variables are generally not stationary at level. Hence, all variables have a unit root at the level. However, all variables or series of stationary after been diferentiated on the irst order, I (1) mean all series integrates on irst order. his indicates a possibility of long-term relationships between the variables in the system. If all series are stationary on the same order then co-integration test is conducted to see the long-term relationships between variables. he regression using time series that are not stationary would most likely produce spurious regression (Granger and Newbold, 1974). Spurious regression occurs if coeicient of determination is high but the relationship between independent and dependent variable has no meaning, or statistically signiicant but do not have a logical theoretical framework. he relationship occurs between variables is only trend relationship, not an actual (Rama, 2013). To know whether the regression result is not spurious then it needs to run co-integration test as developed by Johansen and Julious. Based on the unit root test results in Table 1, it is found out that all variables are stationary on the irst order I (1). his condition allows doing co-integration test to ind whether there is or no long term relationships of variables in the system. his research uses co-integration test, the procedure of Johansen, between variables. To know whether there is co-integration in the system, it is by calculating the maximum eigen value and trace statistics. If there is at least one vector of co-integration in system characterized by the value of maximum egen value and trace statistic is greater than the value of its statistics, then there is co-integration. http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 9 (2), July 2017 298 Table 2. Result of Johansen Co-integration Test Unrestricted Co-integration Rank Test (Trace) Hypothesized No. of CE(s) Eigenvalue Trace Statistic 0.05 Critical Value Prob.** None * 0.437262 165.1525 150.5585 0.0057 At most 1 0.333566 111.6829 117.7082 0.1131 At most 2 0.223787 73.94221 88.80380 0.3599 At most 3 0.182154 50.38274 63.87610 0.3970 At most 4 0.163123 31.68215 42.91525 0.4058 At most 5 0.089833 15.12083 25.87211 0.5645 At most 6 0.066171 6.366989 12.51798 0.4152 Trace test indicates 1 cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Unrestricted Co-integration Rank Test (Maximum Eigenvalue) Hypothesized No. of CE(s) Eigenvalue Max-Eigen Statistic 0.05 Critical Value Prob.** None * 0.437262 53.46956 50.59985 0.0245 At most 1 0.333566 37.74072 44.49720 0.2249 At most 2 0.223787 23.55948 38.33101 0.7696 At most 3 0.182154 18.70058 32.11832 0.7514 At most 4 0.163123 16.56132 25.82321 0.4952 At most 5 0.089833 8.753842 19.38704 0.7495 At most 6 0.066171 6.366989 12.51798 0.4152 Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Table 2 presents the result of Johansen co-integration test. his test uses lag 2 based on Akaike Information Criteria (AIC), residual on every VAR equation that is free from the problem of normality and autocorrelation. Based on the value of the Trace Statistics and Max-Statistics it is found out that there is 1 co-integration vector in the system. hese indings indicate that all data of the variables used in this study, namely: gold price (Ln Gold), money supply (Ln Fiat), Inlation, economic growth http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 Desmadi Saharuddin: Currency System and Its Impact on Economic Stability 299 (Ln Output), stock prices (Ln Shares), unemployment rates (Unemployment) and interest rates (Interest) integrated to each other, i.e. the entire variables tend to move towards the equilibrium in the long term. In other words, in every short-term period, all variables will mutually adapt to achieve long-term balance (equilibrium). his means that result of the estimation of the regression is not spurious, but it has long-term relationships between variables. Based on the results of unit root test and Johansen co-integration test then it can do further testing to see the dynamic relationships among variables of gold as a proxy of commodity-based money system and M2 as proxy of iat money system with a number of macroeconomic indicators, such as inlation, output, stock prices, unemployment, and interest. Table 3. he Result of Granger Causality Test for Gold Null Hypothesis: Ln_Fiat does not Granger Cause Ln_Gold Obs F-Statistic Probability 94 0.39132 0.6773 0.52268 0.5947 3.64476 0.0301 3.0509 0.0523 3.74812 0.0274 1.60792 0.2061 1.68838 0.1907 0.30135 0.7406 0.85044 0.4307 5.21108 0.0072 Ln_Gold does not Granger Cause Ln_Fiat Ln_Output does not Granger Cause Ln_Gold 94 Ln_Gold does not Granger Cause Ln_Output Ln_Stock does not Granger Cause Ln_Gold 94 Ln_Gold does not Granger Cause Ln_Stock Unemployment does not Granger Cause Ln_Gold 94 Ln_Gold does not Granger Cause Unemployment Interest does not Granger Cause Ln_Gold 94 Ln_Gold does not Granger Cause Interest Note: signiicant if the value of the probability is less than 0.01. Granger postulated that a variable X is said to afect another variable Y, i.e. if the current Y can be predicted even better by using past values of X. his test examines if a free variable (the independent variable) has a comparison of non-free variable (the dependent variable) that is reciprocal. Granger Causality Test is a test performed to igure out the causal relationships between variables that are being analyzed. Related to this research, Granger Causality Test allows making comparison of the existence of the relationship of one or both directions of the variables used in the study. Quality Granger test result is displayed on Table 3 and Table 4. his http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 9 (2), July 2017 300 research found out that there is a two-way relationship between economic growth (Ln Output) and gold price (Ln Gold). his shows that gold price has a reciprocity relation with the level of industrial production. It thus can be interpreted that the use of commodity-based money system (gold) can afect a country’s economic growth rate, and vice versa. Other interesting inding is that the gold price has a signiicant inluence in one direction with the level of interest rates (interest). his means the gold-based money system can afect the variation that occurs at the level of interest rates. But instead, in commodity-based money system, interest rates do not have one-way causality in the currency system. his shows that gold-based currency system is relatively independent from the interest rate. Table 3 also shows that stock prices have one-way causality with the gold price. his indicates that the stock price movements can have the signiicant efect against commodity-based money. But instead, the gold price has no efect against the same price. While the others variables are found to have no causal relationship with the gold price. his shows that commodity-based money does not have too much efect toward a number of speciied variables. Table 4. he Result of Granger Causality Test for Fiat Null Hypothesis: Inlation does not Granger Cause Ln_Fiat Obs F-Statistic Probability 94 0.0412 0.9597 0.06014 0.9417 0.72407 0.4876 1.30586 0.2761 1.34606 0.2655 1.79749 0.1717 1.0515 0.3537 1.75755 0.1784 0.22123 0.802 1.22131 0.2997 Ln_Fiat does not Granger Cause Inlation Ln_Output does not Granger Cause Ln_Fiat 94 Ln_Fiat does not Granger Cause Ln_Output Ln_Stock does not Granger Cause Ln_Fiat 94 Ln_Fiat does not Granger Cause Ln_Stock Unemployment does not Granger Cause Ln_Fiat 94 Ln_Fiat does not Granger Cause Unemployment Interest does not Granger Cause Ln_Fiat Ln_Fiat does not Granger Cause Interest 94 Note: signiicant if the value of the probability is less than 0.05. Table 4 presents the causal relationship between M2 or money supply and a number of economic variables in the system. he study found out that M2 did not http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 Desmadi Saharuddin: Currency System and Its Impact on Economic Stability 301 have a causal relationship with all the variables used in this study, namely: inlation, economic growth, stock prices, unemployment rates and interest rates. his shows that the system of iat money has no causality with macro economy variable and vice versa. Table 5 presents the summary of relationship patterns between the variables in the system. his study also runs the correlation test between the variables used. he purpose of this test is to ind out to what extent the relationship between the variables. he information is mainly to ind out to what extent the gold price and M2 (money supply) have a relationship with macroeconomic variables, such as inlation, economic growth, stock prices, unemployment rates and interest rates. Surely this is to provide information on whether the money system (a commodity or iat) has a correlation towards macroeconomic variables. Table 5: Summary of the Relationship Gold Fiat LnFiat ======= LnGold Inlation ======= LnFiat LnOutput <=======> LnGold LnOutput ======= LnFiat LnStock =======> LnGold LnStock ======= LnFiat Unemployment ======= LnGold Unemployment ======= LnFiat Interest =======> LnGold Interest ======= LnFiat Table 6 presents the result of correlation test between the variables in the system. he gold price and inlation have a fairly high correlation (61%) with the value of negative inluence. It means that the gold price has a reciprocal relationship with the level of inlation. hus, in respect of a commodity-based money system, if gold prices increase then it will lower the rate of inlation. Of course this inding contrasts with the prevailing monetary theory in general that the system of iat money (M2) is very vulnerable against the inlation. If the amount of money circulating in the economy is growing then potentially creates inlation or raises prices in general. Signiicant negative relationship is also seen between the gold price and the level of interest rates. hus, in the gold-based money system, the gold price will have a negative relationship with the level of inlation. Other interesting inding is that the gold price has a signiicant negative correlation relationship with the unemployment rate. his means, in the gold-based money system, if the money is increasingly strengthened then it will reduce the unemployment rate. But in contrast, outcome of the correlation relationship between gold prices with economic growth is not http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 9 (2), July 2017 302 signiicant. his indicates that the gold-based money is less able to maintain the economic growth. Table 6. he Result of Correlation Test between Variables Variabel Gold Fiat Inlation Output Share Unemployment Interest Gold 1.00 0.92 -0.61 0.06 0.89 -0.96 -0.84 Fiat 0.92 1.00 -0.53 -0.09 0.88 -0.97 -0.79 Inlation -0.61 -0.53 1.00 -0.19 -0.61 0.64 0.81 Output 0.06 -0.09 -0.19 1.00 -0.02 -0.05 0.06 Stock Prices 0.89 0.88 -0.61 -0.02 1.00 -0.89 -0.90 Unemployment -0.96 -0.97 0.64 -0.05 -0.89 1.00 0.84 Interest -0.84 -0.79 0.81 0.06 -0.90 0.84 1.00 Table 6 also presents the correlation of the money supply (M2) with a number of variables in the system. Directions and numbers of correlation between macroeconomic variables with M2 are not much diferent to the previous gold price correlation results. his shows that money system (commodity-based money or iat money) have correlation character with a number of macroeconomic variables. Meanwhile, the result of the correlation between gold prices with M2 has a correlation of over 90% with positive direction. his shows that both variables have a close relationship. It means that the changes of gold prices are highly inluenced by the amount of money in circulation, and vice versa. Analysis of variance decomposition (VDC) presents the change in value of a particular variable in a period, which is caused by the changes in the same variables and other variables during the previous period. In this study, analysis VDC used to quantify the contribution of the price of gold (gold Ln) as a representation of commodity-based currency system and money supply (Ln Fiat) as a representation of iat money system of a number of macroeconomic variables as the indicators of economic stability. Analysis VDC used based on the method of Chlesky decomposition. Based on the analysis in Table 7 VDC it found that the variation of commodity money (gold Ln) afected by the variation itself by 100% in the irst period and decreased consistently in the next period, which amounted to 65.3% in the 20th period. While the inluence of other variables in the innovation system is contributed only 17% in the 15th period and increased to 35% in the 20th period. http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 Desmadi Saharuddin: Currency System and Its Impact on Economic Stability 303 Table 7: he Result of Variance Decomposition Test Variance Decomposition Innovation in Period LnE LnF LnInf LnOut LnS LnP LnInt Money Commodities 1 100.00 0.00 0.00 0.00 0.00 0.00 0.00 (LnGold) 5 86.45 0.43 2.11 0.89 9.53 0.36 0.23 10 82.53 1.89 2.09 1.77 9.04 2.35 0.33 15 74.78 4.22 2.51 3.82 7.77 5.98 0.91 20 65.30 7.12 2.68 6.32 6.70 9.60 2.27 Fiat money 1 0.60 99.40 0.00 0.00 0.00 0.00 0.00 (LnFiat) 5 4.82 91.44 1.26 0.25 0.58 0.21 1.44 10 7.76 83.71 3.05 0.16 2.68 0.83 1.83 15 7.66 78.93 2.73 0.14 5.71 1.22 3.61 20 6.62 76.43 2.22 0.22 7.21 1.53 5.77 Inlation 1 0.02 0.86 99.13 0.00 0.00 0.00 0.00 (Inlation) 5 0.31 1.12 87.14 2.33 0.71 1.08 7.32 10 0.57 1.83 78.25 3.10 7.32 1.64 7.29 15 2.97 1.66 66.09 3.14 12.07 3.05 11.02 20 6.19 2.18 59.41 3.17 11.18 3.88 13.99 Economic growth 1 1.16 1.34 3.01 94.48 0.00 0.00 0.00 (LnOutput) 5 1.54 2.20 1.61 86.90 3.27 0.94 3.55 10 3.36 5.21 2.23 77.53 3.84 2.37 5.46 15 3.62 7.06 2.16 74.27 4.73 2.82 5.35 20 3.56 7.72 2.67 73.01 4.90 2.88 5.26 Stock price 1 0.14 0.19 0.15 2.21 97.31 0.00 0.00 (LnShare) 5 4.54 0.34 3.49 6.24 70.21 0.38 14.81 10 11.86 2.03 9.59 4.53 46.16 0.74 25.09 15 13.48 3.51 11.92 4.14 41.99 0.75 24.21 20 13.09 3.56 11.58 4.05 41.66 1.46 24.61 Unemployment Rate 1 0.18 1.24 0.00 3.73 0.39 94.45 0.00 (Unemployment) 5 0.23 1.06 3.66 2.96 1.62 90.32 0.15 http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 9 (2), July 2017 304 10 0.35 1.10 9.27 13.10 3.26 72.62 0.30 15 0.26 0.78 9.76 20.25 3.34 64.90 0.72 20 0.24 0.61 9.02 24.33 3.22 61.09 1.48 Interest rate 1 0.49 1.77 7.78 1.87 17.54 1.35 69.20 (Interest) 5 14.81 0.67 26.87 0.92 11.50 0.27 44.95 10 19.42 2.20 34.05 0.54 8.46 0.22 35.12 15 17.76 2.22 31.60 0.59 13.95 1.30 32.58 20 16.82 2.64 28.49 0.85 13.81 3.02 34.36 his shows that the shock that occurs on other variables has increased contribution to the variation of the price of gold (gold Ln). hus, in a long period, the variation in the price of gold is inluenced by the innovations that occur in other variables, such as output, inlation rate, stock prices and unemployment. VDC Results for M2 is not much diferent from the results of Ln Gold. In iat money system, a variation that occurs in M2 is strongly inluenced by itself. his is relected in the value of VDC at the beginning of period amounted to 99.4% and decreased slightly in subsequent periods became 76.4% in the 20th period. he inluence of other variables in the system such as interest rates, stocks and inlation is contributed only 5.77%, 7.21% and 2.22 % respectively in the period of the 20th. hese results indicate that other variables did not signiicantly afect the variations that occur in M2 (Ln Fiat). he variations, which occur in inlation is not too large and signiicantly contributed by the innovation that happen on the price of gold (Ln gold) and M2 (Ln Fiat), the contribution of each is equal to 6:19 and 2:18 in the period of the 20th. It shows that inlation is not unduly inluenced by the currency system used by a country. As for the variation of economic growth (Ln Output), only contributed at 3.56% by the price of gold and 7.72% by M2. hese indings suggest that the contribution-based on iat money system is greater in the variation that occurs in output, but its contribution is not signiicant. Contributions innovation price of gold (Ln gold) is relatively higher in the stock price variations. Its contributions have increased at the beginning of the period (0.14%) to the period of the 15th (13.48%) and then decreased to 13.08 at the end of the period of 20th. It means that gold prices contribution to the variations in prices did not experience the same consistency even tend to go up and down in line with the increase in the period. Meanwhile M2 innovation http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 Desmadi Saharuddin: Currency System and Its Impact on Economic Stability 305 contribution to the variations in stock prices is very small and insigniicant, only 3.56% in the period of 20th. VDC results also show that innovation that happened neither in the gold price nor with M2 do not signiicantly contribute to the variation or shock that occurs in the unemployment rate. Means that, the currency system used, whether based on commodity or iat not contributes to the forecast error at the level of inlation. An interesting inding from Table 7 there is about 19% in the 10th period of price of gold innovation contributions (Ln gold) to the variations that occur in interest rates (Interest). However, the contribution has decreased gradually in the next period. While M2 innovation (Ln Fiat) is not much signiicantly contribute to variations in interest. his shows that the system of commodity-based money will only have a relatively large impact on the variation of interest rates in the economy. Based on the VDC test results can be concluded that the system of currency (or commodity-based money or iat) is not much contribute to the variation that occurs in macroeconomic variables. hus, both systems have a dynamic relationship with macroeconomic variables. Figure 1: he Result of IRF Test against Shock in Ln Fiat http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 306 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 9 (2), July 2017 To present a more in-depth analysis of the dynamic relationship between the currency system (commodity-based currency and iat money) and a number of macroeconomic variables as indicators of economic stability, this study adopts the analysis of response function (IRF). IRF analysis conirmed the dynamic response of all variables to the shock of one standard deviation in the variables in the system. In this study, only discussed impulse response which associated with the shock (shock) that derived from the price of gold (Ln Gold) and M2 (Ln Fiat) to the level of inlation rate (inlation), economic growth (Ln Output), the stock price (Ln Shares), the unemployment rate (unemployment), and the rate of interest (interest). IRF analysis results show how a variable response on the shock, which occurs on other variables in a system served throughout 20 periods of time (time horizon). Figure 1 shows the dynamic response of macroeconomic variables (inlation rate, output, stock prices, unemployment and interest rates against the deviation shock standard to the variable price of gold (Ln gold) and M2 (Ln Fiat). he response of inlation at the beginning of the period is negatively increasing until the 6th period. Furthermore, the response experienced a decrease trend until the period of the 14th and experiencing stable up to the period of the 20th. he response of inlation to shocks that occurred on M2 is negative and decreasing, and tends to be stable in the long-term shows that M2 has a negative impact on inlation and stable in the long term. Surely this is diferent with the monetary theory, which says that the iat money system has the potential to create inlation if M2 has increased. Response Ln Output (economic growth) against shock M2 (Ln Fiat) is not much diferent from the previous Inlation response. In period 1, the Ln Output response was positive but gradually becomes negative in the 2nd period and onward; it has increased through the period 8th. After that period, Ln Output response against M2 innovation relatively stable until the 20th period. hese results indicate that the shock that occurs in M2 responded negatively by economic growth and tend to be stable at a longer period. hus, money system based on iat will impact negatively and signiicantly to variations in economic growth in the short term. Similar response relatively is shown by the interest rates (Interest) against the shock, which occur in M2 (Ln Fiat). Innovation happens at M2 responded negatively by the interest which tends to strengthen (negative) at the beginning of the period and experienced a stable negative after the 14th. http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 Desmadi Saharuddin: Currency System and Its Impact on Economic Stability 307 Figure 2: he Result of IRF Test against Shock in Ln Gold Diferent responses relatively show by the unemployment rate variable (unemployment) and stock prices (Ln Shares). Both of these variables showed a positive response in the long term if there is any shock in the money supply (Ln Fiat). In detail, from the period of the 1st to 4th period, the shock on M2 responded negatively and then turned negative after period of 4 to the 20th. Unemployment rate response is relatively increased consistently in the long term. hese indings indicate that the shock in iat currency may stimulate positively on the unemployment rate. It likewise happens to the stock prices, the shock on M2 responded negatively at the beginning of the period and changed the direction to be positive after the 4th period and tend to be stable in the long term. Figure 2 presents the response of inlation rate, output, stock prices, unemployment and interest rates to the shock that occurred in the price of gold (Ln gold) as a representation of commodity-based currency as developed in this study. IRF test results showed that inlation respond positively to the shock that occurs at the Ln Gold. In detail, in period 1, the response was relatively small and furthermore increased the response to stabilize after a period of 10th. hese results certainly conirm that the system of commodity-based money has inlation nature, not much diferent from the system based on iat money as deined in monetary theory. Means that, the use of system on commodity-based money does not mean free of inlation http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 308 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 9 (2), July 2017 Response Ln Output towards Ln Gold shock is positive and tends to be stable after the fourth period. his result indicates that the system of commoditybased money (gold) can have positive inluence on economic growth. However, the pattern dynamics of these two variables lasted only dynamic in the irst period to fourth period and after that tend to be stable. Shock Ln Gold is also signiicant positively response by the price of the shares (Ln Shares). herefore gold price movement signiicantly afects the forecast error of variations in stock prices. Mean that, the gold price movement is quite has impact on the stability of share prices. Instead, the result of IRF in Figure 2 shows that the unemployment rate (unemployment) and interest rates (interest) respond signiicantly negative towards Gold Ln shock. his means that the system of commodity-based money may adversely afect the level of interest rates and unemployment. hus, the system of gold-based money may be relied upon to solve the social problems such as unemployment and may lower interest rates in the economy. Hasan (2008) conclude: irst, return to gold standard at the international level is not considered either desirable or practicable for some reasons. Second, there is no point in having domestic gold standard. hird, having gold dinar as money is not a sharia requirement. Fourth, the issue in monetary economics is to keep the supply of money under control, not of its being made of something valuable as a commodity. Palalic and Bajram (2012) show the stability and security of the trends by using gold dinar. Because there is no negatively afected by luctuations if merchandise were exchange in a particular currency. Dali and Razak (2013) also said that gold dinar is a perfect value keeper. It can be kept for future use, un-creatable indestructible and does not cause inlation. Yusuf et.al (2002) said that the implementation of Gold Dinar would stop the speculators menace. Santoso and Ahmad (2016) showed that Acehnes support, are aware, and involved in the implementation of the gold dinar. he economic factor is the most inluential factor for public acceptance of the gold dinar, followed by investment and Islamic value, political factor, and social factor. Besides that, this study reveals that people seek economic stability to enhance economic welfare and assurance of investment based on money with intrinsic value. Yaacob and Ahmad (2014) found that the rate of inlation and the value of world gold are much lower and more stable during the gold standard phases than the iat money. his indicates that the move to return to gold currency is more apt in the bid to ensure global economic stability. http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749 Desmadi Saharuddin: Currency System and Its Impact on Economic Stability 309 Conclusion his study analyzes empirically how the dynamic relationship between the prices of gold as a representation of a system based on money commodity to the money supply (M2) as a representation of money system based on iat against a number of macroeconomic variables such as inlation rate, production (output), price stocks, the level of unemployment and interest rates. Whether the systems have dynamic efect on a number of macroeconomic issues? his study found that in general the two systems of money (commodity and iat) have a dynamic relationship that is likely to be similar to each other. It means that the two systems do not have contrast distinction. Indeed, it was found that the system of commodity-based money is not free of inlation, as propagated by the supporters of the dinar and dirham (dinarist). herefore, the system on commoditybased money can be the source of the increases of prices in the economy. hese indings are certainly diferent from historical studies mentioned that the source of the increases price issue in Mamluk era due to the displacement of gold money system to money system. Even the iat money system actually has negatively impact on inlation. hus, blaming the iat system as a source of inlation is not fully accurate because the gold prices actually responded positively by the rate of inlation. However, the system of commodity money is efective in the dynamic economic growth and unemployment and on the contrary in the iat money system. herefore, the system of gold-based money is reliable neither in creating high economic growth nor in reducing the unemployment rate. References Al-Maqrizi. (1956). Ighasah al-Ummah bi Kasyi al-Gummah. Damaskus: Mansyurat Dar Ibn al-Walid. Al-Maqrizi . (1997). Al-Suluk li Ma‘rifati Duwal al-Muluk Juz 1. Beirut: Dar alKotob al-Ilmiyah. Allouche, A. (1994). Mamluk Economics A Study and Translation of Al-Maqrizi’s Ighathah. Salt Lake City: University of Utah Press. Dali, S.Z. B.M. & N.B.A. Razak. (2013). Implementation Gold Dinar: Is It Feasible? Prosiding Persidangan Kebangsaan Ekonomi Malaysia VIII, Jilid 3. Dipraja, S. (2011). Siapa Bilang Investasi Emas Butuh Modal Gede (Who Says Gold Investment Requires Huge Funds). Jakarta: PT. Bumi Aksara. Hasan, Z. (2008). Ensuring Exchange Rate Stability: Is Return to Gold (Dinar) Possible? 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Factors Inluencing Public Acceptance of Gold Dinar as Money in Aceh. Malaysian Management Review, 51 (1): 49-66. Sanusi, M.M. (2001). Gold Dinar, Paper Currency and Monetary Stability: An Islamic View. IIUM Law Journal, 9 (2): 143-160. Söderberg, J. (2004). Prices in Medieval Near East and Europe. In Conference of Towards a Global History of Prices and Wages (pp. 19–21). Widarjono, A. (2009). Ekonometrika Pengantar dan Aplikasinya (Econometrics: Principle and Application). Yogyakarta: Ekonisia. Yaacob, S.E. & S. Ahmad. (2014). Return to Gold-Based Monetary System: Analysis Based on Gold Price and Inlation. Asian Social Science, 10 (7): 18-28. Yusuf, A.B.B.M. et.al. (2002). Implementation of he Gold Dinar: Is It he End of Speculative Measures. Journal of Economic Cooperation, 23 (3): 71-84. http://journal.uinjkt.ac.id/index.php/iqtishad DOI: 10.15408/aiq.v9i2.4749