Working Paper: NBER ID: w30009
Authors: Oleg Itskhoki; Dmitry Mukhin
Abstract: We show that the exchange rate may appreciate or depreciate depending on the specific mix of sanctions imposed, even if the underlying equilibrium allocation is the same. Sanctions that limit a country's imports tend to appreciate the country’s exchange rate, while sanctions that limit exports and/or freeze net foreign assets tend to depreciate it. Increased precautionary household demand for foreign currency is another force that depreciates the exchange rate, and it can be offset with domestic financial repression of foreign currency savings. The overall effect depends on the balance of currency demand and currency supply forces, where exports and official reserves contribute to currency supply and imports and foreign currency precautionary savings contribute to currency demand. Domestic economic downturn and government fiscal deficits are additional forces that affect the equilibrium exchange rate. The dynamic behavior of the ruble exchange rate following Russia's military invasion of Ukraine in February 2022 and the resulting sanctions is entirely consistent with the combined effects of these mechanisms.
Keywords: No keywords provided
JEL Codes: E50; F31; F32; F41; F51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sanctions limiting a country's imports (F51) | appreciation of the exchange rate (F31) |
| sanctions limiting exports or freezing foreign assets (F51) | depreciation of the exchange rate (F31) |
| increased precautionary demand for foreign currency (F31) | depreciation of the exchange rate (F31) |
| freezing of foreign assets and heightened uncertainty (F31) | initial depreciation of the ruble (F31) |
| concentration of sanctions on imports (F51) | subsequent appreciation of the ruble (F31) |