WHAT IS THE EFFECT OF U.S.-LED SANCTIONS ON A TARGET NATION'S FOREIGN CURRENCY EXCHANGE RATE?

Abstract

This study seeks to assess the relationship between United States-led sanctions and the foreign exchange rate (vis-à-vis the U.S. dollar) of targeted nations. Recent research has examined various impacts that sanctions have on a target nation, suggesting that sanctions often function as intended, reducing U.S. investment or bilateral trade. But these studies also suggest that unintended consequences can occur: U.S. investment is often replaced with other foreign investment, target nation trade with all partners tends to decrease, and target nations adapt to sanctions. This study explores whether U.S. sanctions affect a more wide-reaching economic indicator, the foreign exchange rate. It finds that certain types of sanctions are associated with modestly statistically significant changes in a targeted nation's long run nominal exchange rate when measured year-on-year and when using a volatility measure for exchange rates.