You're Banned! The Effect of Sanctions on German Cross-Border Financial Flows
53 Pages Posted: 21 Jun 2016
Date Written: 2016
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 cross-border financial flows, with 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 possibly partly evaded.
Keywords: sanction, restriction, cross-border transaction
JEL Classification: F20, F36, F38
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