Discussion Paper Details

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Title: Exchange Rate Shocks and Quality Adjustments

Author(s): Daniel Goetz and Alexander Rodnyansky

Publication Date: September 2020

Keyword(s): crisis, Demand estimation, Devaluations, exchange rate pass-through and Quality

Programme Area(s): Industrial Organization and International Macroeconomics and Finance

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%.

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Bibliographic Reference

Goetz, D and Rodnyansky, A. 2020. 'Exchange Rate Shocks and Quality Adjustments'. London, Centre for Economic Policy Research.