The Crypto Cycle and US Monetary Policy

Natasha Che, Alexander Copestake, Davide Furceri and Tammaro Terracciano

No 2023/163, IMF Working Papers from International Monetary Fund

Abstract: We examine fluctuations in crypto markets and their relationships to global equity markets and US monetary policy. We identify a single price component—which we label the “crypto factor”—that explains 80% of variation in crypto prices, and show that its increasing correlation with equity markets coincided with the entry of institutional investors into crypto markets. We also document that, as for equities, US Fed tightening reduces the crypto factor through the risk-taking channel—in contrast to claims that crypto assets provide a hedge against market risk. Finally, we show that a stylized heterogeneous-agent model with time-varying aggregate risk aversion can explain our empirical findings, and highlights possible spillovers from crypto to equity markets if the participation of institutional investors ever became large.

Keywords: US Monetary Policy; Cryptoassets; Stock Markets.; Fed tightening; crypto market; crypto investor; crypto factor; Virtual currencies; Stock markets; Blockchain and DLT; Financial cycles; Market risk; Global (search for similar items in EconPapers)
Pages: 57
Date: 2023-08-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-des, nep-fdg, nep-mon and nep-pay
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Citations: View citations in EconPapers (3)

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