Abstract

This paper aims to shed light on the importance of health considerations for business cycle
fluctuations and the effect of health status on labour productivity and availability of labour input
for productive use. To this end, Grossman’s (2000) partial-equilibrium framework with endogenous
health is incorporated in an otherwise standard Real-Business-Cycle (RBC) model.
Health status in this setup is modelled as a utility-enhancing, intangible, and non-transferrable
capital stock, which depreciates over time. The household can improve their health (‘produce
health’) through investment using a health-recovery technology. The main results are: (i) overall,
the model compares well vis-a-vis data; (ii) the behaviour of the price of healthcare is adequately
approximated by the shadow price of health in the model; (iii) the model-generated
health variable exhibits moderate- to high correlation with a large number of empirical health
indicators