Exchange rate pass-through to export prices in China: does product quality matter?

ABSTRACT

Using a unique data set of Chinese firm-product-destination level export on the period 2000–2013, this paper investigates the effect of real exchange rate changes on multi-product firms’ price setting decisions on export product with heterogeneous levels of quality. We find less exchange rate pass-through (ERPT) for higher-quality products. Meanwhile, the ERPT is higher when the Renminbi (RMB) appreciates than when it depreciates, and product quality has a greater effect on the ERPT during RMB depreciation. Furthermore, higher distribution costs lead to more pricing-to-market (PTM) and less pass-through. This heterogeneity in ERPT is also robust in different samples and econometric specifications. Combined with the existing studies on the effects of firm heterogeneity on the ERPT, our study helps piece together a more complete picture of the heterogeneity across firms in their reaction to export prices when the exchange rate changes.

KEYWORDS:

• Exchange rate pass-through
• pricing-to-market
• product quality
• incomplete pass-through
• multi-product firms

JEL CLASSIFICATION:

• D21
• F12
• F14
• F31
• L60

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplementary data

Supplemental data for this article can be accessed online at https://doi.org/10.1080/00036846.2023.2283778

Notes

¹ Literature exploring firm-level characteristics and ERPT includes Berman et al. (2012), Li et al. (2015), and Xu et al. (2016) on firm’s productivity; Strasser (2013), and Chen et al. (2022) on financial constrains; Amiti et al. (2014) on market share; Bouvet et al. (2017) on import content.

² Martin and Mejean (2014), Piveteau and Smagghue (2019), and Jaimovich et al. (2023) also apply the methodology of Khandelwal et al. (2013).

³ All other interaction terms are included but not reported in this table.

Additional information

Funding

The work was supported by the National Natural Science Foundation of China [71803060]; Fundamental Research Funds for the Central Universities [23JNQMX01]; Guangdong Office of Philosophy and Social Science [GD20YLJ01]; Natural Science Foundation of Guangdong Province [2018A030310620]; Guangzhou Philosophy and Social Science Foundation [2020GZQN34].