Revisiting the process of aggregate growth recovery after a capital destruction

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.