The Health Channel of Business Cycles

To quantify its magnitude, we build a dynamic general equilibrium model with incomplete markets where agents differ in their health, labor productivity, and wealth. The health channel captures the two-way feedback between pure health shocks — which raise the risk of downward health transitions — and other aggregate shocks, namely, demand and productivity. Our novel estimation strategy identifies the shock correlations, pinning down the health channel. We find the health channel accounts for 14 percent of employment variance over the cycle and 11 percent of the employment decline in the Global Financial Crisis.