Planning and Budgeting

The extant literature pertaining to endogenous growth theory that underlines human capital puts more emphasis on the role of knowledge and education, rather than the impact of social damages on economic growth. Nonetheless, the spread of social damages, such as the weakening of family bonds through divorce, and the surge in crime and addiction in society, can affect economic growth by reducing human capital and productivity. On the other hand, a part of the spread of social damages is due to economic factors. The present study attempts to show the existence of an interaction between macroeconomics and social damages in Iran's Economy by developing a new Keynesian dynamic stochastic general equilibrium model emphasizing the role of human capital. For this purpose, a composite index of social damages was established, in which divorce, drug addiction and crime rates were focused upon. This index, on one hand, affects economic growth and, on the other hand, is affected by macroeconomic conditions. The results show that negative supply shocks, through increase in poverty, unemployment and inflation, lead to the spread of social damages, such as divorce, addiction and crime. In addition, increase in social damages leads to reduction in economic growth by reducing human capital and productivity.