Motivated by recent findings on the cyclical movement of both health and health spending,
we construct a general equilibrium model that distinguishes health care demand from the
demand for other goods. Using this model, we are able to generate inflation dynamics and
cyclicality of health that match the US data. When the model is subjected to an expansionary
monetary policy shock, it yields different output and inflation responses compared with a two‐
sector model with homogeneous demand. We show that the trade‐off between leisure and …