This paper argues that the product quality is an important channel of price adjustments to the exchange rate changes.
To support this view, I elaborate a model of monopolistic competition with heterogenous quality and sizes of trading firms.
I further empirically test the role of quality for the exchange rate pass-through to import prices. I employ a highly detailed
dataset that incorporates the universe of declarations submitted to Russian customs authorities on a daily basis, over the
2011 – 2015 period. The Russian Ruble has been largely volatile and sharply depreciated in 2014 – 2015, which generated
large variance to explore. I compute import quality as the residual of the demand and introduce it to the standard exchange
rate pass-through regression. I find that the higher product quality is associated with softer exchange rate pass-through. I
further isolate the role of the invoicing currency. I make use of the declared exchange rates and conclude that corresponding
pass-through is significantly lower than for the official exchange rates. Finally, I differentiate the pass-through with respect to
the importers’ characteristics, which I source from BvD Orbis. I conclude that when the importers are bigger, the pass-through
is getting stronger. Meanwhile, the magnitude for the most productive importers is softer.