International Monetary Policy and Cryptocurrency Markets: Dynamic and Spillover Effects

Elsayed, Ahmed H.; Sousa, Ricardo M.

Abstract

Using daily data over the period August 5, 2013 - September 27, 2019, this study investigates the dynamic spillovers between international monetary policies across four major economies (i.e. Eurozone, Japan, UK and US) and three key cryptocurrencies (i.e. Bitcoin, Litecoin and Ripple). In doing so, we apply a Time-Varying Parameter Vector Auto-Regression (TVP-VAR) model, a dynamic connectedness approach and network analysis. The empirical results indicate that cryptocurrency returns and monetary policy spillovers were particularly large when shadow policy rates became negative, moderated during the Fed's "tapering process", and sharpened again more recently as cryptocurrency buoyancy returned. Gross directional spillovers suggest that shadow policy rates have more "to give than to receive", while those from and to cryptocurrency returns are naturally volatile. There is also strong interconnectedness between monetary policy in either the US or the Eurozone and the UK, and between Bitcoin and Litecoin. However, the spillovers across monetary policy and cryptocurrencies tend to be muted. Finally, spillovers were only slightly larger during the Fed's "unconventional" policy compared to the "standard" era, but their composition qualitatively changed over time.

Citation

Elsayed, A. H., & Sousa, R. M. (online). International Monetary Policy and Cryptocurrency Markets: Dynamic and Spillover Effects. European Journal of Finance, https://doi.org/10.1080/1351847x.2022.2068375

• Journal Article Type: Article
• Acceptance Date: Apr 6, 2022
• Online Publication Date: May 16, 2022
• Publication Date: May 16, 2022
• Deposit Date: Apr 19, 2022
• Publicly Available Date: Jul 20, 2022
• Journal: European Journal of Finance
• Print ISSN: 1351-847X
• Electronic ISSN: 1466-4364
• Publisher: Taylor and Francis Group
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1080/1351847x.2022.2068375
• Public URL: https://durham-repository.worktribe.com/output/1210063