Restrictions of the Islamic Financial System and Counterpart Financial Support for Xinjiang

This paper builds a theoretical framework of two-period general equilibrium model to explore whether 1) the restrictions of the Islamic financial system (RIFS) limit economic development in Xinjiang and 2) counterpart financial support for Xinjiang (CFSX) promotes economic development and social stability. First, we introduce above mentioned restrictions caused by Islamic beliefs into a general equilibrium model and modify Islamic agents’ budget constraints to define the benchmark equilibrium. Comparing the benchmark equilibrium with the perfect equilibrium, in which these restrictions are removed, we discover the RIFS paradox that RIFS undermine the social welfare and income of Muslims. Second, the financial support is introduced into the pattern of benchmark equilibrium as an exogenous variable to model its impact and hence we define the CFSX equilibrium. A series of policy analyses implies that the CFSX strategy improves living standards and social welfare in Xinjiang.