Economic sanctions are a political tool used by one or more countries to punish another country for violations of international law or the rules of the global trading system. These tools are primarily designed to make a targeted country’s economic activity more expensive so that not following the rules will become less attractive than complying. Sanctions can take many different forms, from simple export controls (which limit the sale of controlled goods and technology to a country) to comprehensive embargoes that completely prohibit trade with a country.
Regardless of their stated goals, it is widely acknowledged that the majority of sanctions fail to achieve their intended outcomes. Instead, they have devastating consequences for the target countries’ economic and political well-being. The extant literature on the economic impact of sanctions has argued that they adversely affect trade flows [1,2,3], cause currency crises [4,5] widen income inequality and poverty gaps [6,7] and hinder economic growth [1,2].
While there is a growing body of work investigating the economic effects of sanctions, much of it relies on the use of unobserved observables such as dummy variables or subjective indicators such as political and economic institutions. Furthermore, the studies rely on data on threatened or planned sanctions rather than on actual sanctions implemented, thus suffering from selection bias. This article aims to close this gap by using a large panel of countries with observed economic and political sanctions. It also aims to capture heterogeneity in sanctions by considering the different levels of trade openness and income classification of sender and target states and calibrates its estimates using simultaneous equations models.