Building a DSGE model with the endogenous levels of pollution, health and economic development

Abstract
This review is devoted to the possibility of building a (closed) macroeconomic DSGE model that would incorporate together the endogenous pollution, endogenous health and endogenous macroeconomic dynamics. Contemporary relevance of this issue is justified by the influence of the population health level on economic dynamics. Extending DSGE models in this direction enhances their practical value and extends the list of government policy issues studied with the help of these models. The review shows that the inclusion of endogenous health in the model can be performed through two channels – via the survival probability (longevity) and via changes in the total amount of time available for labor and leisure. Pollution is also modeled as the negative factor for the health level through the first channel, i.e. changes in survival probability (longevity). Pollution itself can be modelled in various ways: as energy costs for production, or as a stock of pollution or of quality of environment. We propose several ways to build a DSGE model with endogenous levels of pollution and health, and to build such a model in a neoclassical setup based on the model by Fischer and Springborn (2011).

Keywords
DSGE models, endogenous pollution, endogenous health, environmental policy, health care policy



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