Co-movement and Granger causality between Bitcoin and M2, inflation and economic policy uncertainty: Evidence from the U.K. and Japan

Abstract

This study aims to investigate the co-movement and Granger causality between Bitcoin prices (BTC) and M2 (cash, demand, and time deposits), inflation, and economic policy uncertainty (EPU) in the U.K. and Japan. It uses monthly data from 31 July 2010 to 30 August 2020 and employs the wavelet coherence method, Toda-Yamamoto, and nonlinear Granger-causality tests. The empirical results show that (i) Bitcoin prices influence M2 and interact with inflation and EPU. In the short term, inflation affects Bitcoin price positively, supporting Bitcoin as an inflation hedged instrument in Japan. Both in Japan and the U.K., the short-term effects of M2 on Bitcoin prices are negative, while EPU's effects on Bitcoin prices are positive, (ii) a bidirectional Toda-Yamamoto Granger causality exists between Bitcoin prices, inflation, and EPU and confirms that M2 affects Bitcoin prices, (iii) a nonlinear bidirectional causality exists between Bitcoin prices and inflation. While Bitcoin prices Granger cause M2 in the U.K. and Japan, inflation shows a nonlinear Granger causality with EPU in Japan. These findings help investors make investment decisions while considering the effects of M2, inflation, and EPU, and monetary authorities and policymakers make policies involving Bitcoin.

Keywords

• Bitcoin
• M2
• EPU
• Inflation
• Wavelets
• Nonlinear causality