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You’re banned! The effect of sanctions on German cross-border financial flows

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  • Tibor Besedeš
  • Stefan Goldbach
  • Volker Nitsch

Abstract

Summary This paper examines the effect of financial sanctions on cross-border capital flows. While sanctions can be expected to hinder international transactions, thereby putting political and economic pressure on a target country, we study the patterns of adjustment in bilateral financial relationships after the imposition of sanctions along various dimensions. Our analysis is based on highly disaggregated, monthly data from the German balance of payments statistics for the period from 2005 through 2014. During this time, Germany imposed financial sanctions on 20 countries; two of these sanctions have been lifted. Applying a differences-in-differences approach, we find two key results. First, financial sanctions have a strong and immediate negative effect on direct financial flows with the sanctioned country, with cross-border flows reduced in either direction. Second, sanctions imposed by the European Union alone, and therefore only enforced by their member countries instead of the United Nations, are evaded as flows with major trading partners of sanctioned countries increase. We conclude that financial sanctions do matter for capital flows.

Suggested Citation

  • Tibor Besedeš & Stefan Goldbach & Volker Nitsch, 2017. "You’re banned! The effect of sanctions on German cross-border financial flows," Economic Policy, CEPR;CES;MSH, vol. 32(90), pages 263-318.
    • Handle: RePEc:oup:ecpoli:v:32:y:2017:i:90:p:263-318.
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    File URL: http://hdl.handle.net/10.1093/epolic/eix001
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    Cited by:

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    2. Piotr Lukaszuk, 2021. "You can smuggle but you can’t hide: Sanction evasion during the Ukraine crisis," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 71(01), pages 73-125, December.
    3. Besedeš, Tibor & Goldbach, Stefan & Nitsch, Volker, 2021. "Cheap talk? Financial sanctions and non-financial firms," European Economic Review, Elsevier, vol. 134(C).
    4. Matthias Efing & Stefan Goldbach & Volker Nitsch, 2018. "Freeze! Financial Sanctions and Bank Responses," CESifo Working Paper Series 7424, CESifo.
    5. Heydarian, Samira & Pahlavani, Mosayeb & Mirjalili, Seyed Hossein, 2021. "Financial Sanctions and Economic Growth: An Intervention Time-series Approach," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 1-14.
    6. Lee, Yong Suk, 2018. "International isolation and regional inequality: Evidence from sanctions on North Korea," Journal of Urban Economics, Elsevier, vol. 103(C), pages 34-51.
    7. Hinz, Julian & Monastyrenko, Evgenii, 2022. "Bearing the cost of politics: Consumer prices and welfare in Russia," Journal of International Economics, Elsevier, vol. 137(C).
    8. Ina C. Jäkel & Søren Østervig & Erdal Yalcin, 2022. "The Effects of Heterogeneous Sanctions on Exporting Firms —Evidence from Denmark," CESifo Working Paper Series 10086, CESifo.
    9. Xuepeng Liu & Huimin Shi, 2019. "Anti‐dumping duty circumvention through trade rerouting: Evidence from Chinese exporters," The World Economy, Wiley Blackwell, vol. 42(5), pages 1427-1466, May.
    10. Goldbach, Stefan & Nitsch, Volker, 2020. "Capital controls checkup: Cases, customs, consequences," Discussion Papers 47/2020, Deutsche Bundesbank.
    11. Firat Demir & Saleh S. Tabrizy, 2022. "Gendered effects of sanctions on manufacturing employment: Evidence from Iran," Review of Development Economics, Wiley Blackwell, vol. 26(4), pages 2040-2069, November.
    12. Hufbauer, Gary Clyde & Jung, Euijin, 2020. "What's new in economic sanctions?," European Economic Review, Elsevier, vol. 130(C).
    13. Kim, Kyoochul, 2020. "Finding Loopholes in Sanctions: Effects of Sanctions on North Korea’s Refined Oil Prices," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 42(4), pages 1-25.
    14. Li, Haoran & Wan, Xibo & Zhang, Wendong, 2020. "How do Firms Respond to Political Tensions? Evidence from Chinese Food Importers," ISU General Staff Papers 202011250800001118, Iowa State University, Department of Economics.
    15. Joakim Gullstrand, 2020. "What goes around comes around: The effects of sanctions on Swedish firms in the wake of the Ukraine crisis," The World Economy, Wiley Blackwell, vol. 43(9), pages 2315-2342, September.
    16. Nyoni, Thabani, 2019. "The curse is real in Zimbabwe: economic sanctions must go!," MPRA Paper 96911, University Library of Munich, Germany.
    17. Tibor Besedeš & Stefan Goldbach & Volker Nitsch, 2018. "Cheap Talk? Financial Sanctions and Non-Financial Activity," CESifo Working Paper Series 7069, CESifo.
    18. Gold, Robert & Hinz, Julian & Valsecchi, Michele, 2023. "To Russia with love? The impact of sanctions on regime support," Kiel Working Papers 2212, Kiel Institute for the World Economy (IfW Kiel).
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    20. Li, Haoran & Wan, Xibo & Zhang, Wendong, 2021. "How do Firms Respond to Long-term Political Tensions? Evidence from Chinese Food Importers," ISU General Staff Papers 202106020700001118, Iowa State University, Department of Economics.

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    More about this item

    JEL classification:

    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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