Exchange Rate Shocks and Quality Adjustments

60 Pages Posted: 21 Oct 2016 Last revised: 27 Feb 2019

See all articles by Daniel Goetz

Daniel Goetz

Rotman School of Management

Alexander Rodnyansky

University of Cambridge - Faculty of Economics

Date Written: February 24, 2019

Abstract

Do firms respond to cost shocks by reducing the quality of their products? Using microdata from a large Russian retailer that varies its offerings twice-yearly, we document that ruble devaluations are associated with a reduction in the observed material quality of products imported for resale, but that higher quality goods are also more profitable. We reconcile these facts using a simple multi-product sourcing model that features a demand system with expenditure switching, where more profitable products can be dropped more quickly after a cost shock. The estimated model shows that quality downgrading reduces average pass-through by 6% and has meaningful consequences for welfare.

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 (February 24, 2019). 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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