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FLEXIBILITY, SECTORAL HYSTERESIS, AND DOWNTURNS

Published online by Cambridge University Press:  18 January 2007

THOMAS M. STEGER
THOMAS M. STEGER
Affiliation:
Institute for Economic Research, ETH Zurich
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Abstract

This paper sets up a two-sector growth model with sectoral hysteresis because of intersectoral factor reallocation costs. The main results are: (i) The economy under study exhibits nonergodic growth implying path-dependency (history matters) and permanent consequences of temporary shocks. (ii) Flexible economies are more likely to take advantage of technological improvements. The analysis points to a new mechanism in the flexibility-growth nexus, which complements the findings of Bertola (1994). (iii) Periods of negative growth can be explained as optimal responses of an economy to favorable technology shocks. This result sheds light on the fact that economic development is associated with recurring downturns.

Keywords

FlexibilityEconomic GrowthFactor Reallocation CostsHysteresisDownturns
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 11 , Issue 1 , February 2007 , pp. 128 - 148
Copyright
© 2007 Cambridge University Press

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