Abstract
We study the implications of a growth model including social capital and habit formation concerning the recovery of economies that suffer from an exogenous destruction in their capital stock. Habits exhibit very low persistence and depend only on last period’s consumption as suggested by empirical evidence. In addition to physical capital, agents invest in social capital which generates both market (production) and non-market (utility) returns. We study an infinite horizon model and compare its implications to a model with habit formation but without social capital. Our framework is more efficient in generating dynamic patterns that replicate the behavior of the main economic variables during the reconstruction period. High investment in social capital at the beginning of the transition is a key element of our results.
Highlights
This paper focuses on the dynamic transition of economies that experiment the consequences of a destruction in their capital stock
Empirical evidence based on post-war reconstruction highlights the non-monotonic adjustment path followed by these economies, which is in stark contrast with the monotonic process of development observed in economies that do not experience significant negative shocks in their capital stock
We have studied the dynamic transition of economies which suffer from an important negative capital shock
Summary
This paper focuses on the dynamic transition of economies that experiment the consequences of a destruction in their capital stock. This time persistence in the consumption reference is a key element since it allows to moderate the growth rate of the reference stock which is necessary in order to replicate accurately the dynamics of the transition. Alvarez-Cuadrado et al (2004) and Alvarez-Cuadrado (2008) follow the approach of Carroll et al (1997, 2000) by using a reference stock which is a weighted average of past consumption levels This generates a reference stock which adjusts slowly in time and combined with a neoclassical production function allows to generate non-monotonic transitional paths. Our objective is to show that a model where the stock of habits adjusts immediately combined with social capital accumulation is able to reproduce properly the observed features of the transition following an exogenous destruction of the capital shock.
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