Working Paper: CEPR ID: DP17250
Authors: Andreas Freitag; Sarah Lein
Abstract: We document how product quality responds to exchange rate movements and quantify the extent to which these quality changes affect the aggregate pass-through into export prices. We analyze the substantial sudden appreciation of the Swiss franc post removal of the 1.20-CHF-per-euro lower bound in 2015 using export data representing a large share of the universe of goods exports from Switzerland. We find that firms upgrade the quality of their products after the appreciation. Furthermore, they disproportionately remove lower-quality products from their product ranges. This quality upgrading and quality sorting effect accounts for a substantial share of the total pass-through one year after the appreciation. We cross-check our results with the microdata underlying the Swiss export price index, which includes an adjustment factor for quality based on firms' reported product replacements, and obtain similar results.
Keywords: large exchange rate shocks; exchange rate passthrough; quality adjustment
JEL Codes: E3; E31; E50; F14; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate shock (F31) | product quality adjustments (L15) |
| exchange rate shock (F31) | removal of lower-quality products (L15) |
| quality adjustments (L15) | aggregate passthrough (C43) |
| exchange rate shock (F31) | quality sorting effect (L15) |