Quality, trade, and exchange rate pass-through

• Study the effects of exchange rate changes on firms heterogeneous in product quality
• Our model predicts more pricing-to-market for higher quality goods.
• It also predicts that higher quality exports respond less to a real depreciation.
• We use a data set of firm-level Argentinean wine exports to support our predictions.
• Quality is measured using experts wine ratings.

We investigate theoretically and empirically the effects of real exchange rate changes on the behavior of firms exporting multiple products with heterogeneous levels of quality. Our model, which features a demand elasticity that falls with quality, predicts more pricing-to-market and a smaller response of export volumes to a real depreciation for higher quality goods. We provide strong support for the model predictions using a unique data set of Argentinean firm-level wine export values and volumes between 2002 and 2009 combined with experts wine ratings to measure quality. The heterogeneity we find in the response of export prices and volumes to changes in exchange rates remains robust to alternative measures of quality, samples, and specifications.