This paper investigates theoretically and empirically the heterogeneous response of exporters to real exchange rate fluctuations due to the quality of imported inputs and exported output. We develop a model where the production of high-quality products requires high-quality inputs sold in monopolistically competitive foreign markets. The model predicts that exporters using imported inputs have low exchange rate pass- through, but this effect is weaker for firms shipping high-quality goods. This is due to the heterogeneous price adjustments of foreign suppliers selling inputs of different quality. We test the predictions of the model using Italian firm-level trade data for the period 2000–2006. The empirical analysis shows that the imports of intermediates have a significantly weaker effect in reducing the exchange rate pass-through into the export price of high-quality varieties. By showing that the import price of high-quality inputs is less sensitive to exchange rate variations, we provide evidence supporting the theoretical hypothesis that the pricing power of input suppliers weakens the import channel.

Exchange rate pass-through and product heterogeneity: Does quality matter on the import side? / Bernini, Michele; Tomasi, Chiara. - In: EUROPEAN ECONOMIC REVIEW. - ISSN 0014-2921. - 77:(2015), pp. 117-138. [10.1016/j.euroecorev.2015.04.005]

Exchange rate pass-through and product heterogeneity: Does quality matter on the import side?

Tomasi, Chiara
2015-01-01

Abstract

This paper investigates theoretically and empirically the heterogeneous response of exporters to real exchange rate fluctuations due to the quality of imported inputs and exported output. We develop a model where the production of high-quality products requires high-quality inputs sold in monopolistically competitive foreign markets. The model predicts that exporters using imported inputs have low exchange rate pass- through, but this effect is weaker for firms shipping high-quality goods. This is due to the heterogeneous price adjustments of foreign suppliers selling inputs of different quality. We test the predictions of the model using Italian firm-level trade data for the period 2000–2006. The empirical analysis shows that the imports of intermediates have a significantly weaker effect in reducing the exchange rate pass-through into the export price of high-quality varieties. By showing that the import price of high-quality inputs is less sensitive to exchange rate variations, we provide evidence supporting the theoretical hypothesis that the pricing power of input suppliers weakens the import channel.
2015
Bernini, Michele; Tomasi, Chiara
Exchange rate pass-through and product heterogeneity: Does quality matter on the import side? / Bernini, Michele; Tomasi, Chiara. - In: EUROPEAN ECONOMIC REVIEW. - ISSN 0014-2921. - 77:(2015), pp. 117-138. [10.1016/j.euroecorev.2015.04.005]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11572/112155
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