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Exchange Rate Shocks and Quality Adjustments

Daniel Goetz and Alexander Rodnyansky

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

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 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cis and nep-mac
Date: 2019-02-25
Note: ar908
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