The Effect of Improving Health Status on Economic Growth and Environmental Quality in the Framework of a Bayesian Dynamic Stochastic General Equilibrium Model

Shahbazkhani, Valiollah; Horry, Hamid Reza; Keshavarzi, Ali

doi:10.22103/jdc.2023.21943.1410

The Effect of Improving Health Status on Economic Growth and Environmental Quality in the Framework of a Bayesian Dynamic Stochastic General Equilibrium Model

Document Type : Research Paper

Authors

Valiollah Shahbazkhani ¹

Hamid Reza Horry ²

Ali Keshavarzi ²

¹ Department of Economics, Kerman Branch, Islamic Azad University, Kerman, Iran.

² Department of Economics, Faculty of Management and Economics, Shahid Bahonar University of Kerman, Kerman, Iran.

10.22103/jdc.2023.21943.1410

Abstract

Objective: Improving health has become a significant societal priority because, as a component of human capital, it improves the ability, efficiency, and quality of life of the labor force (Wu et al, 2021). Moreover, human capital accumulation is a primary determinant of economic growth through its impact on productivity (Jude et al, 2015). Based on this, it is possible to establish a relationship between economic growth and the accumulation of human capital through health. Health is multifaceted and no single variable defines it, but in most studies, life expectancy at birth, death rate of children under 5 years old, and vaccination rate are calculated in most studies (Arora, 2001). Past studies mainly suggest three results to reveal the effect of health on economic growth; The first group shows a positive effect (Li & Huang, 2009 and Shen et al., 2020), the second group shows a negative relationship (Jude et al., 2015; Tobing & Jeng, 2012 and Wang et al., 2019), and the third group shows no relationship (Mehrara, 2011) between these two indicators. On the other hand, some studies analyze this relationship with combined data and the results provide different results depending on the different groups of the statistical population (Acemoglu & Johnson, 2007; Jude et al., 2015 and Wang, 2011). Environmental degradation is one of the negative consequences of economic growth (Destek & Aslan, 2020; Ehigiamusoe et al., 2019; Ehigiamusoe et al., 2020; Mohsin et al., 2021 and Usman et al., 2020). The widespread consumption of fossil fuels and the emission of carbon dioxide CO2 is one of the concerns of researchers and environmental stakeholders, and it has caused them to provide solutions to deal with environmental problems (Acosta Castellanos et al., 2020; Ehigiamusoe et al., 2019 and Ehigiamusoe et al., 2020). Recently, there has been a relatively large literature on climate change or environmental degradation, in which various indicators have been used in the analyses. Emission of greenhouse gases is of fundamental importance among these different indicators (Rafique et al., 2022). However, studies have mostly used CO2 emissions as a proxy for environmental degradation; Because the emission of CO2 has the highest share in the emission of greenhouse gases. The review of theoretical and empirical studies shows that the role of health improvement on economic growth and environmental quality has not been investigated simultaneously. Therefore, the current research has used a dynamic stochastic general equilibrium model with the aim of understanding the effect of positive health shock on economic growth and environmental quality. The main contribution of this paper to existing studies is formed in three sections. 1) This paper examines the effect of health improvement shock on economic growth and environmental quality in Iran, which, according to the authors' knowledge, has not yet been studied. 2) This paper will be especially useful for Iranian policy makers and provide necessary understanding for other developing countries. 3) Considering the short-term improvement of environmental quality in the face of positive health shock, this article offers a recommendation to move towards sustainable development.
Method: In this paper, a dynamic stochastic general equilibrium model is presented and estimated using the Bayesian approach and seasonal data in the period of 2001:3-2022:4. In this regard, the studied Dynamic Stochastic General Equilibrium (DSGE) model includes households with an unlimited planning horizon, a representative firm producing a homogeneous final product in a perfectly competitive environment, the government, the environment sector, and the oil sector. In order to estimate model parameters, Bayesian method and Random Walk Metropolis-Hastings algorithm (RW-MH algorithm) were used. The data of the observable variables of the model include seasonally adjusted data of Gross Domestic Production (GDP), private consumption, investment and the government expenses; which have been detrended using the Hodrick-Prescott filter. Brooks and Gelman (1998) diagnostic test and Monte Carlo Markov chain show that the parameter estimation is appropriate and reliable. This test shows three parameters, interval, second order moment (m2) and third order moment (m3). After extracting these Markov chains of parameters using Metropolis Hastings algorithm, the degree of accuracy of the chains was tested. According to the results of this test, the intra-chain and inter-chain variance of all parameters have finally converged. Therefore, the Bayesian estimation results have good accuracy.
Results: Figure 4 shows how the model variables respond to a positive health shock. After the shock, the return on health investment increased, and after that, health expenses and exercise hours experienced a significant increase. Due to the increase in the hours of exercise, the working time is reduced and the health status is improved. The complementary relationship between capital and labor in the production function reduces the marginal productivity of capital, investment and production. A decrease in income will lead to a decrease in consumption, but the decrease in consumption and production is very small due to the re-optimization of the household towards a better health status. Investment follows a behavior similar to consumption behavior and faces a decrease. With the passage of time, the lack of physical capital causes an increase in interest rates, physical investment and working hours, and finally, they return to their previous stable level. The initial decline in GDP will follow the initial decline in economic growth; Also, the decrease in GDP leads to reduction of pollution and improvement of environmental quality in the short term.
Conclusion: In general, a positive health shock caused by increasing the productivity of health investment leads to the improvement of health sector variables. On the other hand, this shock causes the macroeconomic variables to decrease in the short term. Also, environmental variables will have a more suitable situation in the short term when faced with a positive health shock. The results of this article are consistent and similar with the results of the studies of Grossman (2000), Vasilev (2017) and Torój (2013). Considering the results of the model estimation and the importance of the role of health in the growth of Iran's economy and environmental quality, it is recommended that: 1) health expenditures be explained as a long-term investment in the economy; 2) using clean technologies to achieve sustainable development; 3) The use of renewable energies instead of fossil fuels should be put on the agenda.

Keywords

Positive Health Shock

Health Expenditure

Human Capital

Sustainable Development

Dynamic Stochastic General Equilibrium

Bayesian Estimation

Subjects

Development Economics

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