The debate over whether monetary policy changes on a global scale have an impact on cryptocurrency returns continues.
According to the latest peer-reviewed study article ‘International Monetary Policy and Cryptocurrency Markets’ from Durham University Business School, international monetary policies have little effect on crypto profits.
The study also discovered that when shadow policy rates were negative, the interconnectivity between cryptocurrency returns and monetary policy spillovers was extremely strong.
This interconnectedness was demonstrated to have decreased during the Fed’s ‘tapering process,’ and it has now sharpened again as crypto buoyancy has returned.
The researchers wanted to see if the dynamic and spillover effects of major countries’ foreign monetary policies on the cryptocurrency industry affected traditional financial assets and cryptocurrencies in the same way.
The researchers used daily data for the Eurozone, Japan, the United Kingdom, and the United States on shadow policy rates, which are indicators of monetary policy activity. Researchers then looked at daily closing price data from three main cryptocurrency markets: Bitcoin (BTC), Litecoin (LTC), and Ripple (XRP) (XRP).
According to their findings, cryptocurrencies have a strong interconnectedness, with returns that are both large and favorable for all of the digital currencies studied.
Furthermore, the data shows a modest, negative correlation between shadow short-rates and cryptocurrency returns, meaning that monetary policy tightening affects cryptocurrency profits. Investors like to’search-for-yield’ in a low-interest-rate environment, confirming the assumption that bitcoin portfolios could provide some diversification benefits.
Professor Ahmed H. Elsayed said:
“In the aftermath of the global financial crisis, central banks in both developed countries and emerging market economies have deployed a series of unconventional monetary policies,”
“Not surprisingly, international monetary policy spillovers became particularly relevant, posing challenges for policymakers. However, our research suggests cryptocurrencies are a less volatile asset when it comes to these spillovers.”
This research backs up the idea that, in recent years, monetary policy coordination has been absent due to unequal economic development. The United States transmits shocks, but the Eurozone and the United Kingdom both send and receive them.
Bitcoin and Litecoin are considered net shock transmitters in the cryptocurrency world, while Ripple is considered a net receiver.
These huge international monetary spillovers cause issues for national governments and emphasize the importance of policy coordination.
Finally, the researchers advise that a global level playing field be established to reduce regulatory arbitrage and prevent financial instability caused by rapid changes in capital flows from portfolio reallocations into and out of cryptocurrencies.
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