Flexibility and Frictions in Multisector Models

45 Pages Posted: 29 May 2018

See all articles by Jorge Miranda-Pinto

Jorge Miranda-Pinto

University of Queensland

Eric R. Young

University of Virginia

Date Written: May 28, 2018

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

Miranda-Pinto, Jorge and Young, Eric R., Flexibility and Frictions in Multisector Models (May 28, 2018). CAMA Working Paper No. 24/2018, Available at SSRN: https://ssrn.com/abstract=3186354 or http://dx.doi.org/10.2139/ssrn.3186354

Jorge Miranda-Pinto (Contact Author)

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Eric R. Young

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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