International Trade and Macroeconomic Dynamics with Sanctions

Fabio Ghironi, Daisoon Kim and Galip Ozhan

No 19109, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop a framework combining dynamic, intertemporal choices of general-equilibrium macro models with microfoundations of modern trade theory to study sanctions. In a two-country, two-sector setup, Home holds a comparative advantage in producing differentiated consumption goods via heterogeneous firms with endogenous entry, while Foreign in homogeneous intermediate goods from fixed number of firms. Sanctions include trade bans and financial restrictions excluding particular Foreign agents from markets. In our model, sanctions reallocate resources across and within countries, affecting production, exchange rates, and welfare, with larger welfare losses when targeting sectors of comparative disadvantage. Focusing only on long-run outcomes, overlooking initial dynamics, inaccurately assesses welfare impacts. Sanctions weaken international comovement and fragment markets but leave business cycles intact.

Keywords: Business cycles; Macroeconomic dynamics; Sanctions; Trade; Welfare (search for similar items in EconPapers)
JEL-codes: F31 F41 F42 F51 (search for similar items in EconPapers)
Date: 2024-05
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Journal Article: International trade and macroeconomic dynamics with sanctions (2025)
Working Paper: International Trade and Macroeconomic Dynamics with Sanctions (2024)
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