International Monetary Policy and Cryptocurrency Markets : Dynamic and Spillover Effects

This study investigates the dynamics and spillovers between international monetary policy, between cryptocurrencies and across the two using daily data for four major economies (Eurozone, Japan, UK and US) and three key cryptocurrencies (Bitcoin, Litecoin and Ripple) over the period August 5, 2013 - September 27, 2019. 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 interconnected 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