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Exchange rate pass-through, firm heterogeneity and product quality: a theoretical analysis

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  • Zhi Yu

Abstract

This paper theoretically explores how exchange rate pass-through depends on firm heterogeneity in productivity and product differentiation in quality. Using an extended version of the Melitz and Ottaviano (2008) model, I show that exporting firms absorb exchange rate changes by adjusting both their markups and product quality, which leads to an incomplete exchange rate pass-through. Moreover, the absolute value of exchange rate absorption elasticity (the percentage change in the export prices denominated in the currency of the exporting country in response to a one percent change in the exchange rate rate) negatively depends on firm productivity for products with high scope for quality differentiation, but positively depends on firm productivity for products with low scope for quality differentiation.

Suggested Citation

  • Zhi Yu, 2013. "Exchange rate pass-through, firm heterogeneity and product quality: a theoretical analysis," Globalization and Monetary Policy Institute Working Paper 141, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddgw:141
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    File URL: http://www.dallasfed.org/assets/documents/institute/wpapers/2013/0141.pdf
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    5. Benjamin R. Mandel, 2010. "Heterogeneous firms and import quality: evidence from transaction-level prices," International Finance Discussion Papers 991, Board of Governors of the Federal Reserve System (U.S.).
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    7. Dramane Coulibaly & Hubert Kempf, 2010. "Does Inflation Targeting decrease Exchange Rate Pass-through in Emerging Countries ?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00497446, HAL.
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    Cited by:

    1. Chen, Natalie & Juvenal, Luciana, 2016. "Quality, trade, and exchange rate pass-through," Journal of International Economics, Elsevier, vol. 100(C), pages 61-80.

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    Trade ; Markets;

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