Cryptocurrencies and monetary policy spillovers
Researchers from Durham University Business School and the University of Minho have found that cryptocurrency returns are unaffected by spillovers caused by changing international monetary policies. The study aimed to understand the effects of major countries’ monetary policies on the cryptocurrency market and its relation to traditional financial assets.
The researchers used daily data on shadow policy rates from the Eurozone, Japan, the UK, and the US and daily closing price data on Bitcoin, Litecoin, and Ripple. Their findings showed strong interconnectedness between cryptocurrencies, with high and positive return correlations. They discovered that monetary policy tightening has a negative effect on cryptocurrency returns. In low-interest rate environments, investors tend to search for yield, reinforcing diversification gains provided by cryptocurrencies.
The studies highlight that strong international monetary spillovers pose challenges for national authorities, emphasizing the importance of policy coordination. The researchers recommend creating a global level playing field to prevent regulatory arbitrage and deter potential financial instability that might be attributed to capital flow shifts related to the cryptocurrency market.
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