Does social capital explain the Solow residual? A DSGE approach

Abstract Social capital has been credited with playing a role in many desirable economic outcomes. We analyze how these potentially beneficial effects translate into the macro-performance of economies by developing a dynamic stochastic general equilibrium (DSGE) model featuring the role of social capital in the explanation of 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.