The impact of financial sanctions on financial risk of target countries

By using panel data of 181 countries of which 83 countries have been subjected to financial sanctions from 1980 to 2020, this article employs a Time-Varying difference-in-differences (DID) model and explores the nexus between financial sanctions and financial risk. This article finds firstly that financial sanctions significantly increase the fin ancial risk of target countries. Second, we conclude that financial sanctions increase the financial risks of target countries by limiting international capital flows and foreign aids. Third, financial sanctions affect the risk for foreign debt, risk for debt service and risk for international liquidity significantly, however financial sanctions have no impact on risk for exchange rate stability and risk for current account. Last but not least, financial sanctions increase the financial risk significantly for countries with low political stability and financial development level, however the effect is not significant in countries with high level of political stability and financial development. In the light of this, our research should help policymakers in many nations develop valuable policies from the perspective of international politics and finance.