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Flexibility and frictions in multisector models

Author

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  • Jorge Miranda-Pinto
  • Eric R. Young

Abstract

This paper documents two facts: (i) elasticities of substitution in production vary significantly across sectors, with manufacturing sectors being generally less flexible than service sectors, and (ii) during the Great Recession the rise in bond spreads varied systematically with these elasticities. Specifically, more flexible sectors paid lower spreads during the Great Recession. Moreover, among the less-flexible manufacturing sectors, sectors with relatively high flexibility and high debt saw their spreads rise less than average, while among the more-flexible service sectors the sectors with relatively high flexibility and high debt saw their spreads rise more. We interpret these results using a simple two-sector model with working capital constraints, and show that the model replicates these observations if manufacturing sectors face constraints on their purchases of intermediates while services face constraints on their purchases of labor/capital. The dynamics of intermediate prices and quantities support our results, as does a quantitative investigation of a 62-sector version of the US economy.

Suggested Citation

  • Jorge Miranda-Pinto & Eric R. Young, 2018. "Flexibility and frictions in multisector models," CAMA Working Papers 2018-24, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2018-24
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2018-05/24_2018_miranda-pinto_young.pdf
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    References listed on IDEAS

    as
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    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.
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    Cited by:

    1. 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).
    2. 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.
    3. 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.
    4. Koster, Hans & Hayakawa, Kazunobu & Thisse, Jacques-François, 2021. "High-speed Rail and the Spatial Distribution of Economic Activity: Evidence from Japan's Shinkansen," CEPR Discussion Papers 15771, C.E.P.R. Discussion Papers.
    5. Jorge Miranda-Pinto & Gang Zhang, 2022. "Trade Credit and Sectoral Comovement during Recessions," Working Papers Central Bank of Chile 961, Central Bank of Chile.
    6. 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.
    7. Miranda-Pinto, Jorge, 2018. "A note on optimal sectoral policies in production networks," Economics Letters, Elsevier, vol. 172(C), pages 152-156.
    8. 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.
    9. 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.
    10. 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).
    11. 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.
    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

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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