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The prices of higher quality goods respond less to exchange-rate movements

The prices of higher quality goods respond less to exchange-rate movements

Natalie Chen, The CAGE Background Briefing Series No. 25, August 2015
background briefing series,political economy,policy briefing

Natalie Chen, The CAGE Background Briefing Series No. 25, August 2015

Empirical research finds that import prices do not fully adjust to exchangerate changes. In other words, there is a limited response of trade to exchangerate 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