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Do export quality and destination income matter for exchange rate pass-through? Evidence from China

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  • Zou, Zongsen
  • Zhang, Yu
  • Wang, Meng
  • Wang, Xiuling

Abstract

This study explores how export quality and destination income affect the degree of exchange rate pass-through (ERPT). While the literature has well documented various determinants of incomplete ERPT, we provide more insights by identifying factors from both supply and demand dimensions. Using Chinese export data over the 2002–2019 period, our empirical results indicate that export prices in home currency increase (decrease) with depreciation (appreciation) of the home currency. Chinese exporters tend to adopt a pricing-to-market (PTM) strategy, resulting in an incomplete ERPT rate of approximately 70%. Export quality and destination income are found to be crucial determinants. The ERPT is asymmetric to exchange rate movements and susceptible to uncertainties. Notably, the exporters subject to high additional duties still have PTM ability during the US–China trade war (2018). For China, these findings help explain the exchange rate disconnect puzzle and highlight the significance of adjusting the exchange rate policy.

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  • Zou, Zongsen & Zhang, Yu & Wang, Meng & Wang, Xiuling, 2022. "Do export quality and destination income matter for exchange rate pass-through? Evidence from China," Economic Modelling, Elsevier, vol. 117(C).
    • Handle: RePEc:eee:ecmode:v:117:y:2022:i:c:s0264999322002991
    DOI: 10.1016/j.econmod.2022.106062
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    More about this item

    Keywords

    Exchange rate pass-through; Pricing-to-market; Export quality; Destination income; Exchange rate disconnect puzzle; US–China trade war;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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