Working Paper: NBER ID: w29989
Authors: Javier Bianchi; César Sosapadilla
Abstract: This paper explores the role of restrictions on the use of international reserves as economic sanctions. We develop a simple model of the strategic game between a sanctioning (creditor) country and a sanctioned (debtor) country. We characterize how the sanctioning country should impose restrictions optimally, internalizing the geopolitical benefits and the potential losses of a default by the sanctioned country. A calibrated version of the model can account for the sequence of events leading to the Russian default. Moreover, it suggests that for every dollar of economic damage inflicted to Russia, the US is willing to give up 0.50 dollars of its own consumption.
Keywords: No keywords provided
JEL Codes: F3; F34; F41; F42; F51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Soft restrictions on reserves by Russia (L71) | US benefits (free lunch) (I38) |
| Hard restrictions on reserves by Russia (L71) | Costs for US due to default (H63) |
| Level of restrictions (H10) | Likelihood of default by Russia (F34) |
| Optimal restriction for low geopolitical externality (H21) | Indifference between repaying and defaulting for Russia (F34) |
| Complete freezing of reserves (E49) | Induced default by Russia (G33) |
| Economic damage inflicted on Russia (N44) | US sacrifices consumption (E21) |