International trade and macroeconomic dynamics with sanctions

Fabio Ghironi, Daisoon Kim and Galip Kemal Ozhan

Journal of Monetary Economics, 2025, vol. 154, issue C

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 a 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; Exchange rate; Macroeconomic dynamics; Sanctions; Trade; Welfare (search for similar items in EconPapers)
JEL-codes: F31 F41 F42 F51 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:154:y:2025:i:c:s0304393225000819

DOI: 10.1016/j.jmoneco.2025.103810

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