This dissertation explores quantitative implications of heterogeneity in price stickiness and contractual vulnerability within an open economy context. Particular attention is given to the effects of these frictions on sectoral variables during economic downturns.

Chapter 1 documents that U.S. producer prices of differentiated goods barely moved in recent recessions, while the declines in industrial production were large. In contrast, for nondifferentiated goods, large producer price reductions were accompanied by relatively small adjustments in production. Similar patterns have been found in international trade data on prices and quantities. I use a two-country general equilibrium model with trade in nondifferentiated and differentiated goods to shed light on the reasons behind these sectoral differences. I focus on two mechanisms: sector-specific nominal rigidities and endogenous variable markups at the producer level. The calibration of the main parameters of the model is based on micro data and national accounts data. The impulse responses of relative prices and quantities to a monetary shock are compared with empirical vector autoregressions, showing a good match. These responses can largely be explained by heterogeneity in the frequency of price adjustment, while the variable markup channel is quantitatively less important.

Chapter 2, co-written with Renzo Castellares, starts from the observation that some products are more sensitive to imperfect contracting than others. Hence, industries exhibit different degrees of contractual vulnerability. We build a simple theory in which: (i) exporters are paid after delivery of the goods, and (ii) a complementarity exists between (procyclical) contract enforcement at the importing-country level and contractual vulnerability at the industry level. In this model, an adverse aggregate shock in an importing country generates a disproportional decline in imports in more contractually vulnerable industries. Using disaggregated bilateral trade data for many countries from 1989 to 2000, and exploiting the variation in contractual dependence across manufacturing industries, we find robust empirical support for the model's predictions. The estimated sectoral effects are statistically significant and economically important. Our analysis employs different industry measures of contractual vulnerability, including a novel indicator that reflects payment defaults among firms.