Exchange rate, product quality and export price

WANG Yaqi1 DAI Mi2 XU Jianwei2

(1.National School of Development of Peking University 100871)
(2.Business School of Beijing Normal University)
【Knowledge Link】distribution cost

【Abstract】Based on China customs’ minutely sorted export transaction data at the firm-product level, this paper investigated the influence of RMB exchange rate fluctuations on the export prices of China’s products from 2000 to 2006. The research found that the export prices of Chinese products were barely influenced by exchange rate shocks, which means that exchange rate’s export pass-through effect is nearly perfect, that is, China’s exporters basically follow the producer currency pricing (PCP) principle in product pricing. In the meantime, products exported by China’s exporters to high-income nations have a higher exchange rate elasticity of price than those exported to middle and low-income nations. Further research indicates that product quality is an important explanation for the above-mentioned phenomenon. The exchange rate elasticity of export price will increase with the rise of product quality: for each one standard deviation increase in product quality, the exchange rate elasticity of export price will increase by 5.85 percentage points. Therefore, low quality products are quite apt to show a relatively high exchange rate pass-through effect. We found that, comparing with factors such as productivity and intermediate good import, the factor of quality has more explanatory power. The robustness test of this paper proves the reliability of the results.

【Keywords】 RMB exchange rate; rate of exchange rate pass-through; product quality;

【DOI】

【Funds】 Youth Fund Project of the National Natural Science Foundation of China (71303021) Special Grant Program under Central Budget for Basic Scientific Research of Institutions of Higher Education (2012WYB34, SKZZX2013033) China Postdoctoral Science Foundation (2014M550630) Beijing Social Science Foundation (14JGC100) Scientific Research and Innovation Team of Institutions of Higher Education of Sichuan Province (JBK130504)

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(Translated by DENG Guangchao)

    Footnote

    [1]. ① To review relevant literature, please see the research work by Goldberg and Knetter (1997), Burstein and Gopinath (2013), Burstein et al.(2003, 2005). [^Back]

    [2]. ② Moreover, please also refer to the research work by Campos (2010), Fitzgerald and Haller (2013), Li et al. (2012). [^Back]

    [3]. ① These literature also points out that product quality improvement being limited during this period reflects the barriers to entry and invisible constraints China imposed on the private sector. Under this kind of market failure, the enthusiasm of small and medium-size exporters to promote their products’ competitiveness is dampened, which is unfavorable for the improvement of quality of export products on the whole. [^Back]

    [4]. ② For example, the trans-log preference designated by Rodriguez-Lopez (2011). [^Back]

    [5]. ③ The price referred to here is the quality adjusted price (QAP), which could be viewed upon as a “price-quality ratio” indicator. The lower the QAP is, the higher the price-quality ratio is. For specific definition, please refer to the research by Kugler and Verhoogen (2012). [^Back]

    [6]. ① Because the 8-digit code classification standard is being adjusted every year, we are unable to use a general matching Table to present product data consistently through each year, and the 8-digit code horizontal classification standard is thus not used here. [^Back]

    [7]. ① Unit price is calculated by dividing value of export by export volume. There may be a few inconsistencies regarding the unit of measure of firm export volume in the customs database, for example, some export transactions may use kilogram as the unit whereas others may use gram instead. We removed these samples when performing the regression. [^Back]

    [8]. ① Based on previous literature, Anderson and Wincoop (2004) give an estimation range of [5, 10] to the elasticity of substitution σ. [^Back]

    [9]. ① Specifically, the price of imported intermediate goods of firms is derived as the following: Δmc*i,t ≡ ∑j ∈Ji, t mMi,twi,j,m,tΔlogU*i,j,m,t. U*i,j,m,t represents the unit price (in RMB) of intermediate goods m imported from country j by firm i. wi,j,m,t is the average of the shares the firm’s imported intermediate goods represents in its total cost for period t and t-1. Ji,t and Mi,t respectively represent the source country of import for firm i during period t and the collection of imported intermediate goods. [^Back]

    [10]. ① We adopted the semi-parametric estimation method of Olley and Pakes (1996) to estimate firm total factor productivity. [^Back]

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This Article

ISSN:1002-9621

CN: 11-1138/F

Vol 38, No. 05, Pages 17-35

May 2015

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Article Outline

Knowledge

Abstract

  • 1 Introduction
  • 2 Literature review
  • 3 Data source and descriptive statistics
  • 4 Exchange rate elasticity of export price: estimation at the firm level
  • 5 Product quality and exchange rate elasticity of export price
  • 6 Conclusion
  • Footnote

    References