Working Paper: CEPR ID: DP9744
Authors: Natalie Chen; Luciana Juvenal
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 significantly 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.
Keywords: exchange rate passthrough; exports; firms; pricing-to-market; quality; unit values; wine
JEL Codes: F12; F14; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real depreciation (F31) | increase in export prices for higher quality products (F14) |
| higher quality (L15) | higher export prices (F14) |
| real depreciation (F31) | increase in export volumes (F10) |
| increase in export volumes (F10) | smaller increase for higher quality products (L15) |
| real depreciation (F31) | heterogeneous response of prices and quantities (E39) |
| higher income destination countries (F29) | stronger effects of exchange rate fluctuations (F31) |