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Endogenous product adjustment and exchange rate pass-through

Andreas Freitag and Sarah Lein

Journal of International Economics, 2023, vol. 140, issue C

Abstract: We document how product quality responds to exchange rate movements and quantify the extent to which these quality changes affect the aggregate pass-through into export prices. We analyze the substantial sudden appreciation of the Swiss franc post removal of the 1.20-CHF-per-euro lower bound in 2015 using export data representing a large share of the universe of goods exports from Switzerland. We find that firms upgrade the quality of their products after the appreciation. Furthermore, they disproportionately remove lower-quality products from their product ranges. This quality upgrading and quality sorting effect accounts for a substantial share of the total pass-through one year after the appreciation. We cross-check our results with the microdata underlying the Swiss export price index, which includes an adjustment factor for quality based on firms' reported product replacements, and obtain similar results.

Keywords: Large exchange rate shocks; Exchange rate pass-through; Quality adjustment (search for similar items in EconPapers)
JEL-codes: E3 E31 E50 F14 F41 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:140:y:2023:i:c:s0022199622001386

DOI: 10.1016/j.jinteco.2022.103706

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