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Quality, Trade, and Exchange Rate Pass-Through

Author

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  • Chen, Natalie

    (University of Warwick, CAGE and CEPR)

  • Juvenal, Luciana

    (International Monetary Fund)

Abstract

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.

Suggested Citation

  • Chen, Natalie & Juvenal, Luciana, 2013. "Quality, Trade, and Exchange Rate Pass-Through," CAGE Online Working Paper Series 165, Competitive Advantage in the Global Economy (CAGE).
  • Handle: RePEc:cge:wacage:165
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    Cited by:

    1. Takumi Naito, 2016. "Aid for Trade and Global Growth," Review of International Economics, Wiley Blackwell, pages 1178-1201.
    2. Chen, Natalie & Juvenal, Luciana, 2015. "Quality and the Great Trade Collapse," CAGE Online Working Paper Series 249, Competitive Advantage in the Global Economy (CAGE).
    3. Takanori Adachi & Muhammad Michal Fabinger, 2017. "Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly," CIRJE F-Series CIRJE-F-1040, CIRJE, Faculty of Economics, University of Tokyo.
    4. Crinò, Rosario & Ogliari, Laura, 2017. "Financial imperfections, product quality, and international trade," Journal of International Economics, Elsevier, pages 63-84.
    5. Raphael Auer & Thomas Chaney & Philip Sauré, 2012. "Quality pricing-to-market," Globalization and Monetary Policy Institute Working Paper 125, Federal Reserve Bank of Dallas.
    6. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    7. Ahmed Swarnali & Appendino Maximiliano & Ruta Michele, 2017. "Global value chains and the exchange rate elasticity of exports," The B.E. Journal of Macroeconomics, De Gruyter, pages 1-24.
    8. Javier Cravino & Andrei A. Levchenko, 2017. "The Distributional Consequences of Large Devaluations," American Economic Review, American Economic Association, pages 3477-3509.
    9. Sun, Puyang & Hou, Xinyu & Tan, Yong, 2017. "Export Rivalry and Exchange Rate Pass-Through," MPRA Paper 83369, University Library of Munich, Germany.
    10. Takanori Adachi & Michal Fabinger, 2017. "Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly," CIRJE F-Series CIRJE-F-1040, CIRJE, Faculty of Economics, University of Tokyo.
    11. Sims, Eric N. & Quintanar, Sarah, 2017. "Analyzing Barrel Purchasing Decisions on Winery Costs," Working Papers 253849, American Association of Wine Economists.
    12. Berner, Eike & Birg, Laura, 2012. "Retailers and Consumers: The pass-through of import price changes," Center for European, Governance and Economic Development Research Discussion Papers 133, University of Goettingen, Department of Economics.
    13. Chen, Natalie & Juvenal, Luciana, 2015. "Quality and the Great Trade Collapse," Working Papers 231147, American Association of Wine Economists.
    14. Jaimovich, Esteban & Merella, Vincenzo, 2015. "Love for quality, comparative advantage, and trade," Journal of International Economics, Elsevier, pages 376-391.
    15. Chen, Natalie & Juvenal, Luciana, 2016. "Quality, trade, and exchange rate pass-through," Journal of International Economics, Elsevier, pages 61-80.
    16. Jaimovich, Esteban & Merella, Vincenzo, 2015. "Love for quality, comparative advantage, and trade," Journal of International Economics, Elsevier, pages 376-391.
    17. Tan, Yong & Zhao, Chen, 2017. "New Exporters and Continuing Exporters under Exchange Rate Fluctuations," MPRA Paper 77244, University Library of Munich, Germany.
    18. Bernini, Michele & Tomasi, Chiara, 2015. "Exchange rate pass-through and product heterogeneity: Does quality matter on the import side?," European Economic Review, Elsevier, pages 117-138.
    19. Miao, Zhuang & Li, Yifan, 2017. "Trade Scopes across Destinations: Evidence from Chinese Firm," MPRA Paper 80863, University Library of Munich, Germany, revised 15 Aug 2017.
    20. Cardoso-Vargas, Carlos Enrique, 2017. "Distance to the Core, Productivity and Selection of Export Products-Destinations," MPRA Paper 77192, University Library of Munich, Germany.
    21. Hu, Cui & Parsley, David & Tan, Yong, 2017. "Exchange Rate Induced Export Quality Upgrading: A Firm-Level Perspective," MPRA Paper 80506, University Library of Munich, Germany.
    22. Bonadio, Barthélémy & Fischer, Andreas M. & Saure, Philip, 2016. "The speed of exchange rate pass-through," Globalization and Monetary Policy Institute Working Paper 282, Federal Reserve Bank of Dallas.

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    Keywords

    Exchange rate pass-through; pricing-to-market; quality; unit values; exports; firms; wine.;

    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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