Exchange Rate Shocks and Quality Adjustments

Working Paper
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Goetz, Daniel 
Rodnyansky, Alexander  ORCID logo

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.

Quality Downgrading, Exchange Rate Pass-through, Devaluations, Crisis, Demand Estimation
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