Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297431 
Year of Publication: 
2023
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2023-46
Publisher: 
Bank of Canada, Ottawa
Abstract: 
This paper studies international trade and macroeconomic dynamics triggered by economic sanctions, and the associated welfare losses, in a calibrated, three-country model of the world economy. We assume that there are two production sectors in each country, and the sanctioned country has a comparative advantage in production of a commodity (for convenience, gas) needed to produce final, differentiated consumption goods. We consider three types of sanctions: sanctions on trade in final goods, financial sanctions, and gas trade sanctions. We calibrate the model to an aggregate of countries currently imposing sanctions on Russia (the European Union, the United Kingdom, and the United States), Russia, and an aggregate of third countries (China, India, and Turkey). We show that, instead of reflecting the success of sanctions, exchange rate movements reflect the type of sanctions and the direction of the resulting within-country sectoral reallocations. Our welfare analysis demonstrates that the sanctioned country's welfare losses are significantly mitigated, and the sanctioning country's losses are amplified, if the third country does not join the sanctions, but the third country benefits from not joining. These findings highlight the necessity, but also the challenge, of coordinating sanctions internationally.
Subjects: 
Economic models
Exchange rates
International topics
JEL: 
F31
F41
F42
F51
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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