An Efficiency Frontier Model: An Analysis of the Macroeconomic Implications of Structural Shocks

Abstract

This paper uses a simple framework to compare alternative non-steady-state dynamic adjustments in response to a structural shock. The efficiency frontier model provides a tractable solution method with which to mimic sequences of temporary general equilibria under various alternative hypotheses about expectations, the severity of the restrictions on technology and the malleability of factors. The importance of analysing explicit transition paths, as well as the tractability of the solution methiod, is demonstrated using a labour-augmenting technical change shock. A comparison of the perfect foresight dynamically efficient adjustment versus the static expectations adjustment, in response to this labour-augmenting innovation, provides one explanation for the often observed myopic resistance to technical change.

Keywords: Technical Change, Structural Unemployment, Dynamic Efficiency, Restricted Efficiency Frontiers

JEL Classification: 03, D61, D50