Quality, trade, and exchange rate pass-through

Abstract

This paper investigates the heterogeneous response of exporters to real exchange rate ‡uctua-tions due to product quality. We model theoretically the e¤ects of real exchange rate changes on the optimal price and quantity responses of …rms that export multiple products with heterogeneous levels of quality. The 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 empirically the predictions of the model by combining a unique data set of highly disaggregated Argentinean …rm-level wine export values and volumes between 2002 and 2009 with experts wine ratings as a measure of quality. In response to a real depreciation, we …nd that …rms signi…cantly increase more their markups and less their export volumes for higher quality products, but only when exporting to high income destination countries. These …ndings remain robust to di¤erent measures of quality, samples, speci…cations, and to the potential endogeneity of quality.JEL Classi…cation: F12, F14, F31

Exchange Rate Induced Export Quality Upgrading: A Firm-Level Perspective

“…Furthermore, we find that the import price in developed countries fall is twice that in developing countries in response to an import currency appreciation. Without quality upgrading, this result contradicts the findings in Chen and Juvenal (2016) and Bernini and Tomasi (2015), who find that exchange rate pass-through is decreasing in traded product quality.…”

“…X f,t−1 is a vector of time-varying attributes of firm f in year t − 1, containing firm-level productivity, capital intensity, 22 Similar specifications are used by Berman et al (2012), Chen and Juvenal (2016), Greenaway et al (2008), and Chatterjee et al (2013), who note that the estimated coefficients will capture the long term response of the dependent variable (quality) to changes in the exchange rate. For robustness, we also estimate the benchmark regression after taking firm-difference, and we find that our results remain qualitatively unaffected.…”

“…For example, Bernini and Tomasi (2015) and Chen and Juvenal (2016) argue that firms exporting high quality products have a lower exchange rate pass-through. Berman et al (2012) and Li et al (2015) both document that more productive firms respond more to exchange rate movements in their F.O.B export price, and Amiti et al (2014) demonstrate that exchange rate pass-through is decreasing in firm-level import intensity and export market share.…”

“…A considerable number of papers document the impact of exchange rate fluctuations on export prices and volumes (Cushman, 1983;Dell, 1999;Mc Kenzie, 1999;Forbes, 2002;Marquez and Schindler, 2007;Cheung et al, 2009;Thorbecke and Simith, 2010;Berman et al, 2012;Li et al, 2015;Chen and Juvenal, 2016). However, the specific mechanism that exchange rate fluctuations affect export quality is less well understood.…”

“…The second channel is pricing-to-market (Atkson and Burstein, 2008;Amiti et al, 2014), in which exporting firms endogenously absorb exchange rate fluctuations by adjusting their markups, which stabilizes trade price fluctuations. Third, a large literature explains incomplete pass-through by introducing local distribution costs (Berman et al, 2012;Li et al, 2015;Chen and Juvenal, 2016;Campa and Goldberg, 2005;Chatterjee et al, 2013;Giri, 2012).…”