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Flexibility and Frictions in Multisector Models

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Abstract
Cross-sectoral heterogeneity in sectoral bond spreads is related to sectoral elasticities of substitution in production. During the Great Recession, more flexible firms paid lower sectoral bond spreads, generated higher revenues, and held more working capital. A model consistent with these facts— input-output linkages, working capital constraints, and heterogeneous elasticities—predicts that sectoral distortions during the Great Recession generated an efficiency wedge—due to input misallocation—2.4 times larger than one with homogeneous production functions. In addition, our model predicts input-output connections amplified the Great Recession 2.3 times as much as one with homogeneous elasticities.

Suggested Citation

  • Jorge Miranda-Pinto & Eric R. Young, 2019. "Flexibility and Frictions in Multisector Models," Discussion Papers Series 608, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uq2004:608
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    File URL: https://economics.uq.edu.au/files/46395/608.pdf
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    References listed on IDEAS

    as
    1. Javier Bianchi, 2011. "Overborrowing and Systemic Externalities in the Business Cycle," American Economic Review, American Economic Association, vol. 101(7), pages 3400-3426, December.
    2. Andrew T. Foerster & Pierre-Daniel G. Sarte & Mark W. Watson, 2011. "Sectoral versus Aggregate Shocks: A Structural Factor Analysis of Industrial Production," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 1-38.
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    8. Miranda-Pinto, Jorge, 2018. "A note on optimal sectoral policies in production networks," Economics Letters, Elsevier, vol. 172(C), pages 152-156.
    9. Huiyu Li, 2015. "Leverage and Productivity," Discussion Papers 15-015, Stanford Institute for Economic Policy Research.
    10. David Rezza Baqaee & Emmanuel Farhi, 2019. "The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem," Econometrica, Econometric Society, vol. 87(4), pages 1155-1203, July.
    11. repec:zbw:bofrdp:2015_025 is not listed on IDEAS
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    13. Christoph E. Boehm & Aaron Flaaen & Nitya Pandalai-Nayar, 2019. "Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 Tōhoku Earthquake," The Review of Economics and Statistics, MIT Press, vol. 101(1), pages 60-75, March.
    14. Simon Gilchrist & Egon Zakrajsek, 2012. "Credit Spreads and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 102(4), pages 1692-1720, June.
    15. Sophie Osotimehin & Latchezar Popov, 2023. "Misallocation and Intersectoral linkages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 177-198, December.
    16. Jorge Miranda Pinto, 2021. "Production Network Structure, Service Share, and Aggregate Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 39, pages 146-173, January.
    17. Charles I. Jones, 2011. "Intermediate Goods and Weak Links in the Theory of Economic Development," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 1-28, April.
    18. Saki Bigio, 2013. "Financial Frictions in Production Networks," 2013 Meeting Papers 121, Society for Economic Dynamics.
    19. Alessandra Peter & Cian Ruane, 2019. "The Aggregate Importance of Intermediate Input Substitutability," 2019 Meeting Papers 1293, Society for Economic Dynamics.
    20. repec:zbw:bofrdp:urn:nbn:fi:bof-201512101464 is not listed on IDEAS
    21. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Jorge Miranda-Pinto & Gang Zhang, 2022. "Trade Credit and Sectoral Comovement during Recessions," Working Papers Central Bank of Chile 961, Central Bank of Chile.
    2. Benoit Julien & John Kennes & Ian King, "undated". "Quality Job Programs, Unemployment and the Job Quality Mix," MRG Discussion Paper Series 4721, School of Economics, University of Queensland, Australia.
    3. Miranda-Pinto, Jorge, 2018. "A note on optimal sectoral policies in production networks," Economics Letters, Elsevier, vol. 172(C), pages 152-156.
    4. Kame Babilla, Thierry U., 2023. "Digital innovation and financial access for small and medium-sized enterprises in a currency union," Economic Modelling, Elsevier, vol. 120(C).
    5. Sophie Osotimehin & Latchezar Popov, 2023. "Misallocation and Intersectoral linkages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 177-198, December.
    6. Jae Won Lee & Seunghyeon Lee, 2025. "Monetary Non-Neutrality in a Multisector Economy: The Role of Risk-Sharing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 55, January.
    7. Behrens, Kristian & Kichko, Sergei & Thisse, Jacques-Francois, 2024. "Working from home: Too much of a good thing?," Regional Science and Urban Economics, Elsevier, vol. 105(C).
    8. Florentine Schwark & Andreas Tryphonides, 2022. "Digitalization and Resilience to Disaggregate Shocks," University of Cyprus Working Papers in Economics 08-2022, University of Cyprus Department of Economics.
    9. Miranda-Pinto, Jorge & Silva, Alvaro & Young, Eric R., 2023. "Business cycle asymmetry and input-output structure: The role of firm-to-firm networks," Journal of Monetary Economics, Elsevier, vol. 137(C), pages 1-20.
    10. HAYAKAWA Kazunobu & Hans R.A. KOSTER & TABUCHI Takatoshi & Jacques-François THISSE, 2021. "High-speed Rail and the Spatial Distribution of Economic Activity: Evidence from Japan's Shinkansen," Discussion papers 21003, Research Institute of Economy, Trade and Industry (RIETI).
    11. Sen, Ali, 2020. "Structural change within the services sector, Baumol's cost disease, and cross-country productivity differences," MPRA Paper 99614, University Library of Munich, Germany.
    12. Jorge Miranda Pinto, 2021. "Production Network Structure, Service Share, and Aggregate Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 39, pages 146-173, January.
    13. Miranda-Pinto, Jorge & Young, Eric R., 2019. "Comparing dynamic multisector models," Economics Letters, Elsevier, vol. 181(C), pages 28-32.

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    More about this item

    Keywords

    Elasticity of substitution; credit spreads; working capital constraints;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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