165/2013 Natalie Chen and Luciana Juvenal

This paper investigates the heterogeneous response of exporters to real exchange rate fluctuations due to product quality. We combine 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 mark-ups and less their export volumes for higher quality products, but only when exporting to high income destination countries. These results remain robust to different measures of quality, samples, specifications and to the potential endogeneity of quality. To motivate our Findings we extend the model of Corsetti and Dedola (2005) with local distribution costs and allow firms to 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. Overall our results help to explain the low exchange rate pass-through that is typically observed in aggregate data.

Culture and Development

Journal of International Economics

http://dx.doi.org/10.1016/j.jinteco.2016.02.003