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.