Quality, Trade, and Exchange Rate Pass-Through

Author/Editor:

Natalie Chen ; Luciana Juvenal

Publication Date:

March 12, 2014

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper investigates theoretically and empirically the heterogeneous response of exporters to real exchange rate fluctuations due to product quality. Our model shows that the elasticity of demand perceived by exporters decreases with a real depreciation and with quality, leading to more pricing-to-market and to a smaller response of export volumes to a real depreciation for higher quality goods. We test the proposed theory using a highly disaggregated Argentinean firm-level wine export dataset between 2002 and 2009 combined with experts wine rankings as a measure of quality. The model predictions find strong support in the data and the results are robust to different measures of quality, samples, specifications, and to the potential endogeneity of quality.

Series:

Working Paper No. 2014/042

Subject:

Exchange rate adjustments Exchange rates Export prices Exports Foreign exchange International trade Prices Real exchange rates

English

Publication Date:

March 12, 2014

ISBN/ISSN:

9781475526394/1018-5941

Stock No:

WPIEA2014042

Pages:

58

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