Exchange Rate Shocks and Quality Adjustments

83 Pages Posted: 12 Sep 2020

See all articles by Daniel Goetz

Daniel Goetz

Rotman School of Management

Alexander Rodnyansky

University of Cambridge - Faculty of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 2020

Abstract

Do firms respond to cost shocks by reducing the quality of their products? Using microdata from a large Russian retailer that refreshes its product line twice-yearly, we document that higher quality products are more profitable than lower quality ones, but that the number of high quality products offered experiences a relative decrease after a large ruble devaluation in 2014. We show that rising firm costs-and not shrinking consumer incomes-explains the reallocation, and rationalize the data with a simple model that features consumer expenditure switching between high and low qualities. The reallocation to lower quality products reduces average pass-through by 15%.

Keywords: crisis, Demand estimation, Devaluations, exchange rate pass-through, Quality

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

Suggested Citation

Goetz, Daniel and Rodnyansky, Alexander, Exchange Rate Shocks and Quality Adjustments (September 2020). CEPR Discussion Paper No. DP15248, Available at SSRN: https://ssrn.com/abstract=3688202

Daniel Goetz (Contact Author)

Rotman School of Management ( email )

United States

Alexander Rodnyansky

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

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

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