Modelling Health and Output at Business Cycle Horizons for the USA

In this paper we employ a theoretical framework - a simple macro model augmented with health - that draws guidance from the Keynesian view of business cycles to examine the relative importance of permanent and transitory shocks in explaining variations in health expenditure and output at business cycle horizons for the USA. The variance decomposition analysis of shocks reveals that at business cycle horizons permanent shocks explain the bulk of the variations in output, while transitory shocks explain the bulk of the variations in health expenditures. We undertake a shock decomposition analysis for private health expenditures versus public health expenditures and interestingly find that while transitory shocks are more important for private sector expenditures, permanent shocks dominate public health expenditures.