Flexibility and Frictions in Multisector Models

We show that during the Great Recession, more-flexible sectors paid lower sectoral bond spreads. rationalize this fact with a model input-output linkages, heterogeneous elasticities, and binding working capital constraints in use of intermediates. difference flexibility between upstream downstream is key for determining role linkages amplifying or mitigating distortions. Calibrating to US economy, we find our elasticity estimates amplify distortions by factor 1.7 compared Cobb-Douglas case, generate an multiplier 1.2 times homogeneous case. (JEL E23, E32, E43, E44, H56, L16)