Discussion paper

DP15248 Exchange Rate Shocks and Quality Adjustments

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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Citation

Goetz, D and A Rodnyansky (eds) (2020), “DP15248 Exchange Rate Shocks and Quality Adjustments”, CEPR Press Discussion Paper No. 15248. https://cepr.org/publications/dp15248