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Dec 22, 2024
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Sep 21, 2025
Published
Sep 21, 2025
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Abstract

The IS-LM model is a widely used analytical framework in conventional economics to explain the interaction between the goods market (IS) and the money market (LM); however, this approach carries assumptions that are inconsistent with the principles of Islamic economics, such as the presence of interest (riba), speculative practices, and unequal wealth distribution, thereby requiring reconstruction to make the model relevant to the Sharia system. This study employs a library research method by reviewing academic literature, books, and journal articles related to the IS-LM concept and the principles of Islamic economics, using a qualitative-descriptive approach to identify common ground and key differences between the conventional and Islamic frameworks. The findings reveal that IS-LM equilibrium within the Islamic perspective can be achieved through fiscal and monetary policies based on Sharia principles, where fiscal policies emphasize fair wealth distribution, the management of zakat, infak, and waqf as sources of social financing, and the elimination of practices that cause inequality, while monetary policies focus on the prohibition of riba, the avoidance of speculative practices (gharar), and the strengthening of profit-and-loss sharing systems as alternative financing mechanisms. Accordingly, the IS-LM model remains applicable as a tool for macroeconomic equilibrium analysis but within a framework that emphasizes justice, sustainability, and the objectives of maqasid al-shariah. This study concludes that integrating macroeconomic theory with Islamic principles is essential not only for enriching the theoretical development of Islamic economics but also for providing practical alternatives in formulating economic policies for countries adopting Sharia-based systems, thereby offering analyses and solutions that are more aligned with moral values, social justice, and collective welfare.

Keywords

Fiscal Policy IS-LM Equilibrium Islamic Economics Monetary Policy

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Rizki, N., & Lailiyah Zahrani, N. (2025). Analysis of the IS-LM Balance in the Context of Monetary Policy and Fiscal Policy. Limbago: Journal of Islamic Finance, 1(1), 14–23. Retrieved from https://journal.denisyasmartconsulting.co.id/index.php/limbago/article/view/93
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