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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: http://www.uq.edu.au/economics/abstract/608.pdf
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    References listed on IDEAS

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    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.
    3. 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.
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    5. repec:bof:bofrdp:urn:nbn:fi:bof-201512101464 is not listed on IDEAS
    6. Benigno, Gianluca & Chen, Huigang & Otrok, Christopher & Rebucci, Alessandro & Young, Eric R., 2013. "Financial crises and macro-prudential policies," Journal of International Economics, Elsevier, vol. 89(2), pages 453-470.
    7. David Rezza Baqaee & Emmanuel Farhi, 2017. "Productivity and Misallocation in General Equilibrium," NBER Working Papers 24007, National Bureau of Economic Research, Inc.
    8. Daron Acemoglu & Ufuk Akcigit & William Kerr, 2016. "Networks and the Macroeconomy: An Empirical Exploration," NBER Macroeconomics Annual, University of Chicago Press, vol. 30(1), pages 273-335.
    9. Simon Gilchrist & Egon Zakrajsek, 2012. "Credit Spreads and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 102(4), pages 1692-1720, June.
    10. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
    11. Enghin Atalay, 2017. "How Important Are Sectoral Shocks?," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(4), pages 254-280, October.
    12. 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.
    13. repec:eee:ecolet:v:172:y:2018:i:c:p:152-156 is not listed on IDEAS
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    Cited by:

    1. repec:eee:ecolet:v:172:y:2018:i:c:p:152-156 is not listed on IDEAS
    2. Jorge Miranda-Pinto, 2019. "Production Network Structure, Service Share, and Aggregate Volatility," Discussion Papers Series 607, School of Economics, University of Queensland, Australia.

    More about this item

    Keywords

    Elasticity of substitution; credit spreads; working capital constraints;

    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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