Inflation and health in a Schumpeterian growth model: Theory and evidence

Researchers have found many benefits of good health. However, health investment may be subject to borrowing constraints. In this study, we incorporate endogenous health investment in a scale-invariant Schumpeterian growth model. We find the following. When the cash-in-advance (CIA) constraint does not apply to medical expenditures, long-run growth does not depend on the nominal interest rate. In contrast, when the CIA constraint does apply to medical expenditures, an increase in the nominal interest rate leads to a decrease in both R&D and health investment, which in turn reduce the long-run growth rates of technology and output. Nevertheless, welfare is always a decreasing function of the nominal interest rate, and the welfare loss is greater under the CIA constraint on medical expenditures. As an empirical test, we build panel data for 61 countries during the years 1995-2014. We find a significant, negative effect of inflation on out-of-pocket health expenditure (% of total expenditure on health) of the World Development Indicators of the World Bank, which provides support for our theory. The policy implication is that government financing of health care for the poor can offset this effect.