Sanctions and the Exchange Rate

Oleg Itskhoki and Dmitry Mukhin

No 30009, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E50 F31 F32 F41 F51 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-cba, nep-cis, nep-ifn, nep-mac, nep-opm and nep-tra
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Citations: View citations in EconPapers (26)

Published as Oleg Itskhoki & Dmitry Mukhin, 2022. "Sanctions and the Exchange Rate," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 57(3), pages 148-151, May.

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Journal Article: Sanctions and the Exchange Rate (2022)
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Working Paper: Sanctions and the Exchange Rate (2022)
Working Paper: Sanctions and the exchange rate (2022)
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