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Faculty of Economics

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Goetz, D. and Rodnyansky, A.

Exchange Rate Shocks and Quality Adjustments

CWPE1915

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 passthrough by 6% and has meaningful consequences for welfare.

JEL Codes: E30 F14 F31 L11 L15 L16 L81 M11

Author links: Alexander Rodnyansky  

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1915.pdf

Open Access Link: https://doi.org/10.17863/CAM.39727