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How Chinese monetary policy impacts cryptocurrency demand: The role of economic policy uncertainty

By Truong Minh Loc (VNP 24)

Supervisor: Dr. Nguyen Vu Hong Thai

Abstract:

Analyses on the cryptocurrency’s price formation have recently raised attention among academic studies. By nature, this asset should be examined in the monetary aspect, which considers a system of complex relationships among macro variables. However, there is still a huge research gap raised from the lack of theoretical frameworks on this topic. The contribution of this thesis is threefold. First, we augment two famous monetary theories into the cryptocurrency context, including Money Demand Theory (MD) and Monetary Transmission Mechanism (MTM). Second, based on the constructed theoretical framework, we explain the asymmetric effect of a monetary policy on cryptocurrency by a set of empirical models. Third, we identify the role of the Economic Policy Uncertainty index (EPU), established by Baker, Bloom, & Davis (2016), in the relationship between monetary policy and cryptocurrency. Our empirical results conclude that a higher EPU is expected to weaken the impacts from a tightening monetary policy on cryptocurrency market.

Findings from this thesis aim to provide a number of helpful implications for at least three types of readers. First, findings from this research will provide a policy implication for authorities who are making efforts to govern the cryptocurrency markets, especially in the rising of central-bank digital currencies (CBDC). Second, this is also a theoretical guideline for cryptocurrency investors who want to exploit the fluctuation of the market. Third, by shedding lights to the cryptocurrency’s behaviour as well as its financial nature, this study aims to provide a theorical framework for further research.

Regarding technique aspects, we adopt a multi-stage set of econometric models. Stage 1 aims to re-calibrate the relationship between cryptocurrency returns and the monetary policy, which is represented by policy rates in level form. Stage 2 employs a set of dummy variables with the purpose of separately analysing the effect of a tightening and easing monetary policy. Stage 3 uses a number of interaction terms to quantify the role of EPU in the relationship between monetary policy and cryptocurrency. In all stages above, we employ the Quantile Regression for Panel Data (QRPD) model, along with the Generalized Least Squares (GLS) as a benchmark method. 

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