The prices of higher quality goods respond less to exchange-rate movements
The prices of higher quality goods respond less to exchange-rate movements
background briefing series, policy briefing, political economy
Natalie Chen, Luciana Juvenal, The CAGE Background Briefing Series No. 51, January 2014
Empirical research finds that import prices do not fully adjust to exchange-rate changes. In other word, there is a limited response of trade to exchange-rate fluctuations. This column argues that part of this pass-through puzzle is explained by quality. Exchange-rate movements are more strongly absorbed into the export prices of higher quality goods. Therefore, the volume of their exports would be less responsive to exchange-rate shocks, leading to an incomplete exchange-rate pass-through.
Political Economy