Does social capital explain the Solow residual? A DSGE approach

The literature has credited social capital with playing a role in many desirable economic outcomes. We analyze how these potentially beneficial effects translate into the performance of economies by developing a dynamic stochastic general equilibrium (DSGE) model featuring the role of social capital in explaining the Solow residual. We then simulate and estimate the model with Bayesian techniques using Italian data. Our framework fits actual data better than a standard DSGE model, suggesting that social capital may improve the economic performance via its impact on total factor productivity. Including human capital in the model further raises social capital’s ability to explain the Solow residual.