Vertical Product Differentiation and Exchange Rate Pass-Through: Evidence from Trade between China and Japan

36 Pages Posted: 28 May 2015

See all articles by Dongmei Hu

Dongmei Hu

Shenzhen University

Jiawen Yang

George Washington University

Zunxin Zheng

Shenzhen University

Date Written: May 27, 2015

Abstract

In this paper, we investigate the impact of vertical product differentiation on exchange rate pass-through (ERPT). We define product vertical differentiation as a spectrum of products that range from high end to low end. Using a comprehensive dataset that includes highly disaggregated products traded between China and Japan from Jan 2000 to Dec 2008, we proxy product vertical differentiation with unit values of imports and exports and find that Japanese exports to China are more toward the high end while Chinese exports to Japan are more on the low end. Our further empirical tests show that exchange rate pass-through to Chinese Yuan selling prices of Japan imports is incomplete and is strongly affected by the degree of vertical differentiation. In particular, higher pass-through is observed where the vertical differentiation is larger between Japan import and China local-made, which suggests higher end Japan exporters are able to keep their Japanese Yen markup more stable.

Keywords: Exchange rate pass-through, Vertical product differentiation, Heterogeneity of ERPT, Highly-disaggregated data, China-Japan trade

JEL Classification: F14, F31, F41, F63, D22

Suggested Citation

Hu, Dongmei and Yang, Jiawen and Zheng, Zunxin, Vertical Product Differentiation and Exchange Rate Pass-Through: Evidence from Trade between China and Japan (May 27, 2015). Available at SSRN: https://ssrn.com/abstract=2611161 or http://dx.doi.org/10.2139/ssrn.2611161

Dongmei Hu (Contact Author)

Shenzhen University ( email )

3688, Nanhai Blvd,
Shenzhen, Guangdong
China

Jiawen Yang

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

Zunxin Zheng

Shenzhen University ( email )

3688 Nanhai Road, Nanshan District
Shenzhen, Guangdong 518060
China

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