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Exchange Rate Shocks and Quality Adjustments

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  • Rodnyansky, Alexander
  • Goetz, Daniel

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%.

Suggested Citation

  • Rodnyansky, Alexander & Goetz, Daniel, 2020. "Exchange Rate Shocks and Quality Adjustments," CEPR Discussion Papers 15248, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15248
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    References listed on IDEAS

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    Cited by:

    1. Rodnyansky, Alexander & Van der Ghote, Alejandro & Wales, Daniel, 2022. "Product quality, measured inflation and monetary policy," Working Paper Series 2680, European Central Bank.

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    More about this item

    Keywords

    Quality; Exchange rate pass-through; Devaluations; Crisis; Demand estimation;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

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