Cryptocurrency meets U.S. trade policy uncertainty in the Trump era: A quantile Granger causality test

Abstract

This paper explores the causal relationship between the U.S. trade policy uncertainty and cryptocurrency returns using the quantile Granger causality test. Unlike traditional approaches that focus on average effects, this method captures asymmetric causal dynamics across the entire conditional distribution. The analysis employs two established indices of trade policy uncertainty developed by Caldara et al. (2020) and by Baker et al. (2016), ensuring robustness and mitigating potential biases from relying on a single measure. The empirical results indicate that changes in cryptocurrency prices consistently Granger cause movements in trade policy uncertainty across most quantiles, suggesting that cryptocurrencies may serve as early indicators of shifts in economic policy sentiment. In contrast, the effect of trade policy uncertainty on cryptocurrency returns is most pronounced in the tails of the distribution, highlighting a stronger influence during periods of extreme market conditions. These findings highlight the importance of accounting for nonlinear and asymmetric effects in assessing the interaction between economic policy uncertainty and cryptocurrency markets.