Working Paper: CEPR ID: DP16869
Authors: Anatoli Colicev; Joris Hoste; Jozef Konings
Abstract: This paper shows that a large exchange rate depreciation affects the cost of living of rich and poor consumers differently. Interestingly, we show that rich consumers are less affected by the depreciation. This is because the depreciation introduces a large variety of products to the market which are more accessible to rich than to poor consumers. We exploit scanner data tracking consumer purchases before and after the large depreciation of the Kazakh Tenge, when it switched from a fixed to a floating exchange rate regime, in August 2015. We use an event study design to show that marginal costs increase more for foreign products than for local products after the depreciation. However, the retail margins on foreign products decrease by more than the retail margins on local products. Thus, the retailer limits relative price movement by adjusting its margins, which helps explain the low sensitivity of domestic absorption to changes in relative border prices. To examine the cost-of-living effect we decompose it into a cost, a retail markup, a substitution and a variety effect. As richer consumers spend, on average, more on foreign varieties, we find that they are disproportionally affected by the cost effect. However, lower retail markups after the shock offset this relative cost increase. Since richer consumers benefit more from changes in product variety, their cost of living increases by less after the depreciation.
Keywords: exchange rate; pass-through; depreciation; scanner data
JEL Codes: F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Depreciation of the Kazakh tenge (F31) | Increased marginal costs for foreign products (F69) |
| Increased marginal costs for foreign products (F69) | Decreased retail margins on foreign products (F61) |
| Decreased retail margins on foreign products (F61) | Dampened price increases for consumers (E31) |
| Lower-income consumers (D12) | Smaller increase in marginal cost of food and beverages (L66) |
| Product variety (L15) | Cost sensitivity for lower-income consumers (D12) |
| Higher-income consumers (D12) | Higher markups and less benefit from increased product variety (D43) |
| Depreciation of the Kazakh tenge (F31) | Increased food and beverage costs (L66) |
| Depreciation of the Kazakh tenge (F31) | Increased food and beverage costs for lower-income consumers (D12) |
| Depreciation of the Kazakh tenge (F31) | Increased food and beverage costs for higher-income consumers (D12) |