Exchange rate fluctuations and quality composition of exports: Evidence from Swiss product‐level data

Abstract

AbstractThis paper studies the relationship between exchange rate movements and the average export quality using disaggregated Swiss product‐level data between 1996 and 2015. We find evidence at different levels of aggregation that the average export quality increases in response to a currency appreciation through compositional effects: currency appreciations shift market shares towards goods that are more expensive and of higher quality. This exchange rate effect on quality is more pronounced for differentiated goods and in sectors with a greater scope for quality differentiation. From a policy perspective, this reallocation effect points to the importance of facilitating structural changes in the export composition to increase the resilience of the export sector to exchange rate shocks. Our results also suggest a positive relationship between the average export quality and aggregate export sales. From a methodological point of view, the findings imply that exchange rate pass‐through estimations without quality controls tend to be biased regardless of aggregation level or type of data.