Cheap Talk? Financial Sanctions and Non-Financial Activity

37 Pages Posted: 21 Jul 2018

See all articles by Tibor Besedes

Tibor Besedes

Georgia Institute of Technology

Stefan Goldbach

Darmstadt University of Technology

Volker Nitsch

Darmstadt University of Technology - Department of Law and Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: June 04, 2018

Abstract

Sanctions restrict cross-border interactions and, therefore, not only put political and economic pressure on the target country, but they also adversely affect the sender country. This paper examines the effect of financial sanctions on the country imposing them. In particular, we analyze the business responses of German non-financial entities to the imposition of sanctions on 23 countries over the period from 1999 through 2014. Examining highly disaggregated, monthly data from the German balance of payments statistics, we find four main results. First, German financial activities with sanctioned countries are sizably reduced after the imposition of sanctions, with strong reductions in the scope of cross-border activities (i.e., the extensive margin) and less robust results for total financial flows which is consistent with the concept of ‘smart sanctions’. Second, firms doing business with sanctioned countries tend to be disproportionately large, making them largely immune to the reduction in business opportunities with selected partners. Third, firms affected by sanctions expand their activities with non-sanctioned countries, some of which display close trade ties to the sanctioned country. Fourth, we find no effect of sanctions on broader measures of firm performance such as employment or total sales. Overall, we conclude that the economic costs of financial sanctions to the sender country are limited.

Keywords: sanction, restriction, cross-border transaction

JEL Classification: F200, F360, F380, F510

Suggested Citation

Besedes, Tibor and Goldbach, Stefan and Nitsch, Volker, Cheap Talk? Financial Sanctions and Non-Financial Activity (June 04, 2018). CESifo Working Paper Series No. 7069, Available at SSRN: https://ssrn.com/abstract=3211784

Tibor Besedes

Georgia Institute of Technology ( email )

221 Bobby Dodd Way
Atlanta, GA 30332-0615
United States

Stefan Goldbach

Darmstadt University of Technology ( email )

Marktplatz 15
Darmstadt, Hesse D-64289
Germany

Volker Nitsch (Contact Author)

Darmstadt University of Technology - Department of Law and Economics ( email )

Marktplatz 15
Residenzschloss
Darmstadt, 64283
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

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