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Quality, Trade, and Exchange Rate Pass-Through

  • Chen, Natalie

    (University of Warwick, CAGE and CEPR)

  • Juvenal, Luciana

    (International Monetary Fund)

This paper investigates the heterogeneous response of exporters to real exchange rate fluctuations due to product quality. We model theoretically the effects of real exchange rate changes on the optimal price and quantity responses of firms 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 firm-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 find that firms signifucantly increase more their markups and less their export volumes for higher quality products, but only when exporting to high income destination countries. These findings remain robust to different measures of quality, samples, specifications, and to the potential endogeneity of quality.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/research/wpfeed/165-2013_chen.pdf
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Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 165.

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Date of creation: 2013
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Handle: RePEc:cge:wacage:165
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