Sanctions and the exchange rate

Itskhoki, Oleg and Mukhin, Dmitry ORCID: 0000-0003-4067-9110 (2025) Sanctions and the exchange rate. Review of Economic Studies. ISSN 0034-6527

Text (sanctionsER_250723) - Accepted Version Available under License Creative Commons Attribution. Download (1MB)

Abstract

Trade wars and financial sanctions are again becoming an increasingly common part of the international economic landscape, and the dynamics of the exchange rate are often used in real time to evaluate the effectiveness of sanctions and policy responses. We show that sanctions limiting a country’s exports or freezing its assets depreciate the exchange rate, while sanctions limiting imports appreciate it, even when both types of policies have exactly the same effect on real allocations, including household welfare and government fiscal revenues. Beyond the direct effect from sanctions, increased precautionary savings in foreign currency also depreciate the exchange rate when they are not offset by the sale of official reserves or financial repression of foreign-currency savings. We show that the dynamics of the ruble exchange rate following Russia’s invasion of Ukraine in February 2022 are quantitatively consistent with the combined effects of these forces calibrated to the observed sanctions and government policies. We evaluate the associated welfare, fiscal and inflationary consequences for both Russia and the coalition of Western countries.

Item Type:	Article
Additional Information:	© The Author(s) 2025
Divisions:	Economics
Subjects:	H Social Sciences > HG Finance H Social Sciences > HF Commerce
JEL classification:	E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General F - International Economics > F3 - International Finance > F31 - Foreign Exchange F - International Economics > F3 - International Finance > F32 - Current Account Adjustment; Short-Term Capital Movements F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics F - International Economics > F5 - International Relations and International Political Economy > F51 - International Conflicts; Negotiations; Sanctions
Date Deposited:	08 Sep 2025 07:33
Last Modified:	13 Nov 2025 15:24
URI:	http://eprints.lse.ac.uk/id/eprint/129422

Actions (login required)

View Item