Do sanctions trigger financial crises?

Abstract

We investigate the effect of sanctions on the occurrence of financial crises. We use the Classification and Regression Tree (CART) algorithm to check whether binary classification mechanism selects sanctions as a predictive factor for the different types of financial crises. We find that trade sanctions matter for the increased probability of banking crises, while military sanctions are associated with currency crises. We find no evidence of the effect of sanctions on sovereign debt crises. We furthermore indicate which variables and their respective thresholds serve as potential harbingers of financial crises.