## Quality, Trade, and Exchange Rate Pass-Through

_IMF Working Papers, March 12, 2014_

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**Canonical URL:** [Quality, Trade, and Exchange Rate Pass-Through](https://www.imf.org/en/publications/wp/issues/2016/12/31/quality-trade-and-exchange-rate-pass-through-41416)

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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

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### 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

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/quality-trade-and-exchange-rate-pass-through-41416_