Exchange Rate Shocks and Quality Adjustments

57 Pages Posted: 21 Oct 2016 Last revised: 30 Jul 2018

See all articles by Daniel Goetz

Daniel Goetz

Rotman School of Management

Alexander Rodnyansky

University of Cambridge - Faculty of Economics

Date Written: October 19, 2016

Abstract

How do firms change the quality composition of their traded goods in response to an exchange rate shock? Using unique data from a large Russian retailer that varies its offerings across seasons, we document that ruble devaluations are associated with a reduction in the observed material and fabric quality of goods the retailer imports for resale. Our results indicate that an increase in the retailer's costs, as opposed to a reduction in demand due to shrinking real incomes, is the driving force. We estimate a simple multi-product sourcing model to quantify the welfare impact of quality adjustments and find that preventing firms from downgrading overstates the welfare loss from the 2014 ruble devaluation by 33%, while incorporating cost heterogeneity but ignoring quality has ambiguous effects on welfare changes in general.

Keywords: Quality Downgrading, Exchange Rate Pass-through, Devaluations, Crisis, Demand Estimation

JEL Classification: D92, E30, F14, F31, L11, L15, L16, L81, M11

Suggested Citation

Goetz, Daniel and Rodnyansky, Alexander, Exchange Rate Shocks and Quality Adjustments (October 19, 2016). Available at SSRN: https://ssrn.com/abstract=2855920 or http://dx.doi.org/10.2139/ssrn.2855920

Daniel Goetz

Rotman School of Management ( email )

United States

Alexander Rodnyansky (Contact Author)

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

HOME PAGE: http://www.arodnyansky.com

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