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.
