Quality, Trade, and Exchange Rate Pass-Through
IMF Working Papers, March 12, 2014
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- Quality, Trade, and Exchange Rate Pass-Through
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Bibliographic details
- Authors: Natalie Chen, Luciana Juvenal
- Published: March 12, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475526394.001
Summary
- Investigates theoretically and empirically the heterogeneous response of exporters to real exchange rate fluctuations due to product quality.
- Main theoretical result: the elasticity of demand perceived by exporters decreases with a real depreciation and with quality, generating more pricing-to-market and a smaller response of export volumes to a real depreciation for higher quality goods.
- Empirical test uses a highly disaggregated Argentinean firm-level wine export dataset between 2002 and 2009 combined with experts wine rankings as a measure of quality.
- Model predictions find strong support in the data; results are robust to different measures of quality, samples, specifications, and to the potential endogeneity of quality.
Theoretical model and mechanisms
- Key mechanism:
- Elasticity of demand perceived by exporters decreases with a real depreciation.
- Elasticity of demand perceived by exporters decreases with quality.
- Implication: higher pricing-to-market behavior for higher quality goods.
- Implication: smaller response of export volumes to a real depreciation for higher quality goods.
Empirical approach and data
- Data:
- Highly disaggregated Argentinean firm-level wine export dataset.
- Time period covered: between 2002 and 2009.
- Quality measure: experts wine rankings.
- Empirical strategy:
- Tests model predictions linking quality, pricing-to-market, and volume response to real depreciation.
- Addresses potential endogeneity of quality.
- Robustness exercises across different quality measures, samples, and specifications.
Main findings
- Strong empirical support for the model predictions:
- Higher quality goods exhibit more pricing-to-market.
- Higher quality goods show a smaller response of export volumes to a real depreciation.
- Results robust to:
- Different measures of quality.
- Different sample selections.
- Different econometric specifications.
- Tests accounting for potential endogeneity of quality.
Subjects and keywords (as listed)
- Subject: Exchange rate adjustments, Exchange rates, Export prices, Exports, Foreign exchange, International trade, Prices, Real exchange rates
- Keywords: customs data, Europe, Exchage rate pass-through, exchange rate, Exchange rate adjustments, Exchange rates, Export prices, export volume, exports, exports data, firms, Global, pricing-to-market, quality, Real exchange rates, standard deviation, unit value, unit values, WP