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Export price and quality adjustment: The role of financial stress and exchange rate

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  • Chen, Meng-Wei
  • Lu, Cuicui
  • Tian, Yuan

Abstract

This paper constructs a heterogeneous international trade model to investigate the impact of financial stress and exchange rate on credit-constrained exporting firms’ price and quality adjustments. Given that the elasticity of the cut-off cost is higher than the threshold, our model predicts that exporting firms would increase export prices and upgrade quality during times of financial stress or when foreign currency appreciates. Additionally, the incomplete pass-through of exchange rate to prices tends to be greater during times of financial stress. Our predictions on the adjustment effects of export price and quality are broadly confirmed by the trade data of China and its major trading partners from 2001 to 2011.

Suggested Citation

  • Chen, Meng-Wei & Lu, Cuicui & Tian, Yuan, 2021. "Export price and quality adjustment: The role of financial stress and exchange rate," Economic Modelling, Elsevier, vol. 96(C), pages 336-345.
    • Handle: RePEc:eee:ecmode:v:96:y:2021:i:c:p:336-345
    DOI: 10.1016/j.econmod.2020.11.008
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    References listed on IDEAS

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    Cited by:

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    2. Chen Chen & Nimesh Salike & Willem Thorbecke, 2023. "Exchange rate effects on China's exports: Product sophistication and exchange rate elasticity," Asian Economic Journal, East Asian Economic Association, vol. 37(3), pages 371-400, September.

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    More about this item

    Keywords

    Exchange rate pass-through; Pricing to market; Financial stress; Quality choice;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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