Abstract
This paper develops a framework to analyze the interactions between health and business cycles. The individual's health is detemined by his stock of health capital and a stochastic component. Health increases the individual's utility as well as the total time the individual can spend on either work or leisure. The individual invests in health capital as well as in physical capital. He further decides how much of his available time to allocate to labor supply and how much to leisure. In this setting, I show that an unexpected decline in health causes a reduction in output, consumption and labor supply. In response to a decline in health, the individual increases investment in health capital and reduces savings accordingly. I also show that a positive shock to productivity increases both health and physical capital investment. Better health therefore leads to increased savings. Higher productivity, in turn, increases savings and improves health.