Are Health Expenditure and GDP Cointegrated: A Panel Analysis

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1 Journal of Busness and Economcs ISSN USA December 2010 Volume 1 No. 1 Academc Star Publshng Company Are Health Expendture and GDP Contegrated: A Panel Analyss Engn Erdoğan Feyza Arca (Department of Economcs Bga Faculty of Economcs and Admnstratve Scences Canakkale Onsekz Mart Unversty Ağaköy Bga Çanakkale Turkey) Abstract: Ths paper presents and analyzes long run relaton between per capta health expendture (PHE) and per capta gross domestc product (PGDP) over the perod from for a sample of 18 OECD countres usng recent developed panel co-ntegraton technques. Frstly we test whether health expendture and GDP seres are statonary by usng frst generaton second generaton test and panel unt root test based on structural break (PANKPSS) advanced by Carron-I Slvestre et al.(2005) as a fnal pont. After nvestgated to presence of long-run relaton between health expendture and GDP fnally we examne whether health care expendtures are a luxury good. Key words: health care expendtures; cross-secton dependency; panel co-ntegraton JEL Codes: C23 H51 H41 I18 1. Introducton For polcymakers t s mportant to know the long run relatonshp between gross domestc product and health expendtures. Because knowng ths relatonshp enables them to make judgment on how much aggregate health expendtures wll change n the future based on a forecast of the trend n natonal ncome. Thus we examne the long run relaton among per capta gross domestc product (PGDP) per capta health expendtures (PHE) n 18 OECD countres durng the perods usng the recent panel co-ntegraton technques. Also we examne ncome elastcty for health expendtures n 18 OECD countres selected (Australa Austra Belgum Canada Denmark Fnland Germany Iceland Ireland Japan New Zealand Norway Sweden Swtzerland Unted Kngdom Unted States Portugal Span). After the publcaton of the papers n Kleman (1974) and Newhouse (1977) the examnaton of the determnants of health expendtures have begun debates based on whether health expendtures are a luxury good (Carron- Slvestre 2005). Most cross-country studes fnd per capta ncome to be the most mportant determnant of per capta health expendture. Thus we use data set of per capta health expendtures and per capta GDP. The coeffcent estmate of per capta ncome s equal to or greater than one leadng to the concluson that PHE s a luxury rather than a necessty. Otherwse t s equal to be less than unty or closer to beng a necessty rather than a luxury. Correspondng author: Engn Erdoğan Ph.D. professor Department of Economcs Bga Faculty of Economcs and Admnstratve Scences Canakkale Onsekz Mart Unversty; research areas: free zones nternatonal fnance nternatonal economcs economc crses. E-mal: enerdogan@comu.edu.tr. Feyza Arca research assstant Deparment of Economcs Bga Faculty of Economcs and Admnstratve Scences Canakkale Onsekz Mart Unversty; research areas: macroeconomcs econometrcs and statstcs publc economcs labour economcs. E-mal: feyzarca@gmal.com. 42

2 Are Health Expendture and GDP Contegrated: A Panel Analyss Gerdtham et al.(1992) estmate the mpact of per capta ncome on per capta health expendture by usng data from 10 OECD countres for The results of ths study ndcate to health expendtures are a necessty good rather than luxury good. That s an ncome elastcty s exceedng one. Blomqvst and Carter (1997) present an ncome elastcty whch doesn t seem sgnfcantly dfferent from one. But t s mportant to control whether health care expendtures and GDP are statonary. If they are not statonary statstcal evdence based on OLS regressons turns out to be spurous. In ths case estmated coeffcents would be based and nconsstent. For example Hansen and Kng (1996) and Blomqvst and Carter (1997) were not able to fnd contegraton between health care expendtures and GDP except for a few countres. Most research suggests that both PHE and PGDP are non-statonary. Recently researchers have begun to favor panel based unt root tests due to the ncrease n power of test. Ths ncrease n power stems from greater degrees of freedom and ncluson of heterogeneous cross-country nformaton. Mc Coskey and Selden (1998) used the panel unt root test of Im et al.(2003) as a frst generaton test and fnd that both PHE and PGDP are statonary. Gerdtham and Löthgren (2000) fnd that PHE and PGDP are non-statonary when they do ncluson of a tme trend to Mc Coskey and Selden s study. They also presented evdence n favour of co-ntegraton. Okunade and Karakus (2001) found ncome elastcty larger than unt. Sen(2005) s research suggests a range of 0.21 and 0.51 mplyng health care s necessty. Jewell et al. (2003) used a panel LM unt root test that allows for the possblty of structural breaks n order to determne statonarty of PHE and PGDP. Ther results approve that PHE and PGDP are statonary around one or two breaks. Carron- Slvestre (2005) appled the statonarty test of Carron- Slvestre et al. for 20 OECD countres durng and used the database that has been used n the paper s the one n Gerdtham and Lothgren (2000) and Jewell et al. (2003) and has shown that the panel data sets of PHE and GDP are statonary around a broken trend that exhbts multple structural breaks. The paper s organzed as follows: Secton 2 descrbes panel unt root statonarty and contegraton tests used n ths paper. Secton 3 presents and dscusses the fndngs of ths study and last secton concludes ths study. 2. Model and data The model s followng as: PHEt 0 1PGDPt ut (1) The dependent varable s real per capta health care expendture (PHE) n each of the countres. Pror works also establshed the meanngful determnant to nclude: real per capta gross domestc product (PGDP). So we used PGDP as the ndependent varable. The a pror expectaton from receved theory s: PHE / PGDP 0. The database s used perods for a sample of 18 OECD countres (Some countres were excluded for lack of data). Health expendture data were obtaned from OECD 2009 health database real per capta GDP data were obtaned from Penn World Table 4.3. All the model varables are n logs for regresson analyss. The panel unt root test based on structural break (PANKPSS) advanced by Carron- Slvestre et al.(2005) as well as frst generaton panel unt root tests second generaton test were employed. After nvestgated to presence of long-run relaton between health expendture and PGDP fnally we examne whether health care expendtures are a luxury good usng OLS estmaton technque. 43

3 Are Health Expendture and GDP Contegrated: A Panel Analyss Econometrc estmaton and hypotheses testng are done by usng the Gauss 6.0 and E-vews 6 programmes. 3. Some econometrc testng and results 3.1 Analyss of statonary and unt root Ths paper s utlzed from Im Pesaran and Shn (2003)(hereafter IPS) s test Fsher-type test proposed frst by Maddala and Wu (1999) (hereafter MW) then developed Cho (2001) Levn Ln and Chu(2002) (hereafter LLC) Hadr s (2000) test as frst generaton tests cross-sectonally augmented dckey fuller test (hereafter CADF) as second generaton test and Carron- Slvestre et al.(2005) test (PANKPSS) measurng presence of structural break. Frstly we analyze frst generaton test then second generaton test. A frst generaton of models has analyzed the propertes of panel-based unt root tests under the assumpton that the data s ndependent and dentcally dstrbuted (..d) across ndvduals. In general ths type of panel unt root tests s based on the followng regresson: Yt Yt 1 Zt u (2) t where = 1 2 N s ndvdual for each ndvdual t=1 2 T tme seres observatons are avalable Zt s determnstc component and ut s error term. The null hypothess of ths type s =0 for. The frst of frst generaton panel unt root tests s LLC that allow for heterogenety of ndvdual determnstc effects and heterogeneous seral correlaton structure of the error terms assumng homogeneous frst order autoregressve parameters. They assume that both N and T tend to nfnty but T ncrease at a faster rate so N/T 0. They assume that each ndvdual tme seres contans a unt root aganst the alternatve hypothess that each tme seres statonary. Thus referrng to the model (2) LLC assume homogeneous autoregressve coeffcents between ndvdual.e. for all and test the null hypothess H o : 0 aganst the alternatve H : 0for all. The structure of the LLC analyss may be specfed as follows: A t t 1 j t j t j 1 p j Y Y Y u (3) = 1 N t= 1 T where s trend s ndvdual effects t dstrbuted across ndvduals. LLC estmate to ths regresson usng pooled OLS. In ths regresson determnstc components are an mportant source of heterogenety snce the coeffcent of the lagged dependent varable s restrcted to be homogeneous across all members n the panel (Barber 2006). Other test Im Pesaran and Shn (2003) test allows for resdual seral correlaton and heterogenety of the dynamcs and error varances across unts. Hypothess of IPS may be specfed as follows: H o : 0 H A : 0 for all The alternatve hypothess allows that for some (but not all) of ndvduals seres to have unt roots. IPS compute separate unt root tests for the N cross-secton unts. IPS defne ther t-bar statstcs as a smple average N of the ndvdual ADF statstcs t for the null as: t t / N 1 u s assumed to be ndependently It s assumed that t are..d and have fnte mean and varance and E( t ) Var( t ) s computed usng Monte-Carlo smulaton technque. Other test Maddala and Wu (1999) consder defcency of both the LLC and IPS frameworks and offer an alternatve testng strategy (Barber 2006). MW s based on a combnaton of the p-values of the test statstcs for a unt root n each cross-sectonal unt. 44

4 Are Health Expendture and GDP Contegrated: A Panel Analyss Hadr (2000) test permts an easy formulaton for a resdual based LM test of statonary. Hadr adopts the followng components representaton: Yt Z' t rt t where Z t s determnstc component r t s a random walk: r t = r t-1 + u t 2 where u d(0 ) and t s statonary process. Hypothess of Hadr s test s dfferent from other frst t u generaton tests. The null of hypothess of trend statonary corresponds to the hypothess that the random walk equals zero. Further ths test allows the dsturbance terms to be heteroscedastc across. It has to be controlled whether there s dependency across cross-secton n regresson. Thus we test Breusch and Pagan s (1980) cross-secton LM testng. Snce number of cross-secton observaton s smaller number of tme seres observaton n our model t s take nto accounted CDLM1 test of Pesaran (2004). CDLM1 test statstc s followng as: N1 N CDLM1= 2 2 T ˆ j 1 j1 N ( N 1)/2 where ˆj s correlaton of coeffcent across resduals obtaned from each regresson estmated by OLS estmator. One of second generaton tests s Cross-Sectonally Augmented Dckey Fuller (thereafter CADF) testng. Pesaran (2003) presents a new procedure for testng unt root n dynamc panels subject to possbly cross sectonally dependent n addton to serally correlated errors. Pesaran (2003) proposes a test based on standard unt root statstcs n a CADF regresson. CADF process can be reduced wth estmated to ths equaton: p Yt Y t 1 j. Y t j d cy t 1 jy t j t j1 j0 (4) N 1 where Yt N Y N 1 jt Yt N Y and jt t s regresson errors. Let CADF be the ADF statstcs for the j 1 j1 -th cross-sectonal unt gven by the t-rato of the OLS estmate ˆ of p n the CADF regresson(4). Indvdual CADF statstcs are used to develop a modfed verson of IPS t-bar test (denoted CIPS for Cross-sectonally Augmented IPS) that smultaneously take account of cross-secton dependence and resdual seral correlaton: n 1 CIPS N CADF Hypotheszes of both CADF and CIPS s same. The null hypothess s formulated as: Ho: 0Ths hypothess mples that all the tme seres are nonstatonary H : 0 Ths hypothess mples that all the tme seres are statonary process. A So far unt root tests analyzed have assumed that data s produced by a lnear process and a structural break occurs n data generatng process. But when we gnore to presence of break we can obtan based results. Im and Lee (2001) and Carron- Slvestre et al. ( ) are poneer to ths applcaton. Im and Lee (2001) analyzed the case of structural break that changes mean of seres n ndvdual effects and model whch has trendng regressor. Carron- Slvestre et al. s (2005) panel statonary test allows for multple structural breaks through the ncorporaton of dummy varables n the determnstc model. Carron- Slvestre et al. (2005) allow for structural changes to shft the mean and trend of ndvdual tme seres. Further they allow that each ndvdual n the panel can have dfferent number of breaks located at dfferent dates. In ths case under the null hypothess the data generatng process for the varable s assumed to be: 1 45

5 Are Health Expendture and GDP Contegrated: A Panel Analyss where t Y u (5) t t t t m m t k DT ( bk ) t k DUkt t 1 t (6) k1 k1 0 (7)..d(0 ) and 0 a constant wth = (1 N) ndvduals and t=(1 T) tme perods. The 2 dummy varables DT ( ) and DUkt are defned as: bk t where Tbk s date of the break for -th ndvdual. m s allowed to be max number of breaks snce k=1 m. It s assumed that u t and t are ndependent 2 as n Hadr s test. But ther null of hypothess dfferent from panel data test of Hadr (2000) H : 0under null of hypothess whch the model gven by (5) and (6) becomes: where DT * kt = t- T bk t> T bk DT * kt m Y DU DT* u m t k kt k kt t t k1 k1 = 0 elsewhere. Ths model (8) ncludes ndvdual structural break effect (shfts n the mean caused by structural breaks) temporal effects (for 0 ) temporary structural break effect (for k 0 that s only there are changes n ndvdual tme trends). The specfcaton gven by (8) s general enough to allow three characterstcs (Carron-I Slvestre et al. (2005): (1) The structural breaks have dfferent effects on each ndvdual tme seres. Ths effects are measured by k and k. (2) Structural breaks may occur n dfferent dates for each ndvdual tme seres. (3) The number of structural break may change from ndvdual to ndvdual. 2 The test null of hypothess of a statonary panel ( 0 ) that proposed by Hadr (2000) and advanced Carron- Slvestre et al. (2005) wth representaton gven by: t N T ˆ hom( ) t 1 t1 LM N ( T S ) (9) where S ˆ u and S t denotes the partal sum process that obtaned when t s used the estmated OLS t j j1 resduals of (8) and where 2 s a consstent estmate of the long-run varance t o (8). n (9) denotes the dependence of LM statstc on the dates of break. For each ndvdual t s defned as the vector ( 1... m )' ( T 1 /... / )' b T Tb m T whch ndcates the relatve postons of the dates of the breaks on the entre the perod T. If varance s allowed to change across cross-secton ndvdual then LM test statstc s can be expressed as: N T (10) t 1 t1 LMhet( ) = N ( ˆ T S ) LM statstcs s standardzed as: N( LM( ) ) Z( ) N(01) They showed that Z( ) statstc normally dstrbuted as frstly T followed by N. For 46

6 Are Health Expendture and GDP Contegrated: A Panel Analyss varable Z( ) the expectaton ( ) and varance ( ) are gven by: 2 m 1 2 A ( k k1) k 1 m B ( k k1) k 1 Carron- Slvestre et al. (2005) accept to beng 0 0 m 1 1 A=1/6 B=1/45 under restrcton to whle they accept to beng A=1/15 B=11/6300 under hypothess of k 0. k 0 Snce computed to Z( ) statstcs t must be detected the breaks n each one of the ndvdual tme seres. Carron- Slvestre et al.(2005) determne endogenously structural break. Thus they follow Ba and Perron (1998) s the global mnmzaton of sum of squared resduals process (SSR). They choose as the estmate of the dates of the breaks the argument that mnmzes the sequence of ndvdual SSR ˆ ˆ ( Tb1... Tb m ) computed from (8). ˆ (... ˆ T T ) arg mn SSR( T... T ) b1 b m Tb1... T b1 b m b m After the dates for all possble m max m (1... N) have been estmated the pont s to select the sutable number of structural breaks and determne optmal value for m. Ba and Perron (1998) propose ths concern usng two dfferent procedures. The frst procedure makes use of nformaton crtera or more specfcally the Bayesan Informaton crteron (BIC) and the modfed Schwarz Informaton crteron (LWZ) of Lu et al. (1997). The second procedure s based on sequental computaton of structural breaks wth the applcaton of pseudo F-type test statstcs. Ba and Perron (2001) compare the procedures and conclude that second one outperforms the frst one. Thus f there are trendng regressors then the number of structural breaks should be estmated usng BIC and LWZ Informaton crtera. On the other hand when the model doesn t nclude trendng regressors the number of structural breaks should be estmated usng sequental procedure (Carron- Slvestre et al.2005). 3.2 Analyss of contegraton If the presence of a unt root s detected n the varables then t s necessary to check for the presence of a contegratng relatonshp among the varables. There are two types of panel contegraton tests n the lterature. The frst s smlar to the Engle and Granger (1987) framework whch ncludes testng the statonarty of the resduals from a levels regresson. The second panel contegraton test s based on multvarate contegraton technque proposed by Johansen (1988). Pedron ( ) and Kao (1999) extend the Engle-Granger (1987) contegraton test. Kao(1999) presents DF and ADF type tests fort he null hypothess of no contegraton n panel data. Kao consders the specal case where contegraton vectors are homogeneous between ndvduals. Thus the test don t allow for heterogenety under alternatve hypothess. The DF type test from Kao follows the followng model: Yt Xt t (11) where =1 N and t=1 T. Both Y t and X t are random walks. It follows that under the null hypothess of no contegraton the resdual seres t should be nonstatonary. The ADF type test from Kao s based on the estmated resduals of p the followng equaton: ˆ ˆ ˆ t t 1 jt j where tp ˆ t s the estmated resdual of equaton (11) and p denotes number of the lags n ADF specfcaton. To test whether Y t and j1 X t are contegrated based on DF or ADF test statstcs the null and the alternatve hypotheses can be wrtten as Ho : 1 H A : 1 respectvely. Pedron ( ) proposes a resdual-based test for he null of contegraton for dynamc panels wth 47

7 Are Health Expendture and GDP Contegrated: A Panel Analyss multple regressors n whch the short run dynamcs and the long run slope coeffcents are permtted to be heterogeneous across ndvduals. The test allows for ndvdual heterogeneous fxed effects and trend terms. Pedron consders the use of seven resdual-based panel contegraton statstcs four based on poolng the data along the wthn-dmenson and three based on poolng along the between-dmenson. Maddala and Wu (1999) use Fsher-type test to propose an alternatve approach to testng for contegraton n panel data by combnng tests from ndvdual cross-sectons to obtan at test statstc for the full panel. Johansen Fsher panel contegraton test combnes ndvdual Johansen s contegraton trace tests and maxmum egen value tests. In Johansen s multvarate contegraton technque trace statstc tests for at most r contegratng vectors among a system of N>r tme seres and the maxmal egen value statstc tests for exactly r contegratng vectors aganst the alternatve hypothess of r+1 contegratng vectors. 4. Emprcal results 4.1 Results of unt root and statonarty tests Table 1 presents the panel data test statstcs of PGDP for the unt root and statonary tests that do not allow for the presence of cross-secton dependency (denoted frst generaton panel unt root tests). The results shown n Table 1 ndcate that the LLC IPS tests except for ADF and PP tests fal to reject the null of non-statonary GDP for all 18 countres the model wth constant. But Hadr (2000) test supports results of ADF and PP tests. That s accordng to Hadr s test we accept to presence of non-statonary n PGDP. If we take nto account the model wth trend we obtan that unt root n PGDP s rejected for 18 countres by means of all tests except for Hadr test. Table 1 Result of frst generaton unt root tests for PGDP n level Frst generaton tests Wthout trend Wth trend Test stat. Prob. Test stat. Prob. Levn Ln & Chu t stat Im Pesaran and Shn W stat ADF Fsher Ch-square stat PP Fsher Ch-square stat Hadr Z-stat Hadr Het. Cons Z stat Note: Number of lag for LLC IPS ADF-Fsher and PP-Fsher test statstcs was selected by Schwarz crteron and for Hadr test was selected by Newey and West (1994) crteron. Table 2 Result of frst generaton unt root tests for PHE n level Frst Generaton Tests Wthout trend Wth trend Test stat. Prob. Test stat. Prob. Levn Ln & Chu t stat Im Pesaran and Shn W stat ADF Fsher Ch-square stat PP Fsher Ch-square stat Hadr Z-stat Hadr Het. Cons Z stat Note: Number of lag for LLC IPS ADF-Fsher and PP-Fsher test statstcs was selected by Schwarz crteron and for Hadr test was selected by Newey and West (1994) crteron. 48

8 Are Health Expendture and GDP Contegrated: A Panel Analyss Table 2 presents the panel data test statstcs of PHE for the unt root and statonary tests that do not allow for the presence of cross-secton dependency (denoted frst generaton panel unt root tests). The results shown n Table 2 clearly ndcate that all tests fal to reject the null of non-statonary PHE for all 18 countres the model wth constant and wth trend. Hadr (2000) test also supports ths result. After obtaned these results t has to be nvestgated whether PGDP and PHE have cross-secton dependency. Thus we test Breusch and Pagan s (1980) cross-secton LM testng. Snce number of cross-secton observaton s smaller than number of tme seres observaton n our model t s taken nto account CDLM1 test of Pesaran (2004). Accordng to Table 3 and Table 4 probablty value of CDLM1 test of both PGDP and PHE converges to zero. Snce probablty value s smaller than sgnfcance level (0.05) we reject to presence of cross-sectonal ndependence. Thus we must rely on second generaton unt root tests nstead of frst generaton unt root tests. Frst generaton tests depend crucally upon the ndependence assumpton across ndvduals and hence not applcable snce cross sectonal correlaton s present. So we must consder results of Table 5. Table 3 Results of cross-secton dependence tests n panel for PGDP Wthout trend Wth trend T stat. Prob. T stat. Prob. CDLM CDLM CDLM Table 4 Results of cross-secton dependence tests n panel for PHE Wthout trend Wth trend T stat. Prob. T stat. Prob. CDLM CDLM CDLM Table 5 CIPS statstcs of PGDP and PHE for all countres Wthout trend Wth trend Varables CIPS stat. CV(%5) CIPS stat. CV(%5) GDP HE Table 5 presents panel data test statstcs for the unt root and statonary tests that do allow for the presence of dependency across panel members. As s seen from Table 5 results mean value of CADF(CIPS stat.) show that null of a unt root n each country s both PGDP and PHE seres can be rejected at the 5% level n the model wth trend and constant n all countres. Carron--Slvestre et al. (2005) and Carron--Slvestre (2005) all of whom conclude that the unt root hypothess can be strongly rejected once the level and/or slope shfts are taken nto account. In ths paper we apply the test of Carron--Slvestre et al. (2005). The emprcal analyss frst specfes a maxmum of m max = 5 structural breaks whch appears to be reasonable gven the number of tme observatons (T = 38) n our study. Table 6 and Table 7 show our results. Table 6 Panel A presents results of panel unt root test based on structural break for PGDP. The null of statonary for PGDP seres can not be rejected by ether the homogeneous or the heterogeneous long-run verson of test n the model wth constant and trend f we use the bootstrap crtcal values 49

9 Are Health Expendture and GDP Contegrated: A Panel Analyss as shown n Panel B. Thus Carron- Slvestre et al.(2005) test (.e. PANKPSS) also support results of CIPS stat for PGDP seres. In Table 7 Panel A presents results of PANKPSS for PHE seres. In contrary to results of PGDP the null of statonary for PHE seres can be rejected by ether the homogeneous or heterogeneous long-run verson of test n the model wth trend f we use the bootstrap crtcal value as shown n Panel B. On the other hand f t s taken account of the model wth only constant then the null of statonary for PHE seres can not be rejected by ether two long-run verson. Table 6 Panel statonary test wth structural breaks for PGDP Panel A: Panel statonary test based on structural break (The test of carron- slvestre et al. 2005) Constant Tme trend Test stat. P Val. Test stat. P Val. LM (λ) Hom LM (λ) Het Panel B: Bootstrap dstrbuton (%) Boots CV. (Constant) Boots CV. (Tme Trend) Hom Het Hom Het Note: The fnte sample crtcal values are computed by means of Monte Carlo smulatons usng replcatons. LM (λ) (hom) and LM(λ) (het) denote the Carron--Slvestre et al. (2005) KPSS test assumng homogenety and heterogenety respectvely n the estmaton of the long-run varance. Table 7 Panel statonary test wth structural breaks for PHE Panel A: Panel statonary test based on structural break (The test of Carron--Slvestre et al. 2005) Constant Tme trend Test stat. P Val. Test stat. P Val. LM (λ) Hom LM (λ) Het Panel B: Bootstrap dstrbuton (%) Boots CV. (Constant) Boots CV. (Tme trend) Hom Het Hom Het Note: The fnte sample crtcal values are computed by means of Monte Carlo smulatons usng replcatons. LM (λ)(hom) and LM(λ) (het) denote the Carron--Slvestre et al. (2005) KPSS test assumng homogenety and heterogenety respectvely n the estmaton of the long-run varance. 50

10 Are Health Expendture and GDP Contegrated: A Panel Analyss After determned presence of non-statonary for PGDP and PHE we nvestgate to degree of statonary of ths varables. Table 8 and Table 9 clearly ndcate that both PGDP and PHE are I(1) varables. Table 8 Result of frst generaton unt root tests for PGDP n frst dfference Frst generaton tests Wthout trend Wth trend Test stat. Prob. Test stat. Prob. Levn Ln & Chu t stat Im Pesaran and Shn W stat ADF Fsher Ch-square stat PP Fsher Ch-square stat Hadr Z-stat Hadr Het. Cons Z stat Table 9 Result of frst generaton unt root tests for PHE n frst dfference Frst generaton tests Wthout trend Wth trend Test stat. Prob. Test stat. Prob. Levn Ln & Chu t stat Im Pesaran and Shn W stat ADF Fsher Ch-square stat PP Fsher Ch-square stat Hadr Z-stat Hadr Het. Cons Z stat Results of contegraton tests The panel contegraton tests pont to the exstence of a long run relatonshp between health expendtures and GDP per capta see Tables For example the null of no contegraton s rejected by most of the Pedron (1999) tests at the 5 percent level. Smlarly Kao resdual contegraton test shows that exstence of contegraton among varables. As seen from results of Table 12 for the panel rank test the hypothess that the largest rank n the panel s r =0 s rejected but the hypothess of a largest rank of r =1 can not be rejected. Based on ths result t s concluded that PHE and PGDP are contegrated around lnear trends for the sample of OECD countres. Table 10 Pedron panel contegraton test Alternatve hypothess: Common AR coeffcent(wthn-dmenson) Statstc Probablty value Weghted statstc Probablty value Panel v-stat Panel-rho stat Panel-PP stat Panel ADF-stat Alternatve hypothess: Indvdual AR coeffcent (between-dmenson) Stat. Probablty value Group-rho stat Group-PP stat Group ADF-stat Note: Trend assumpton: no determnstc trend lag selecton: automatc SIC wth a max lag of 6 and Newey-West bandwth selecton wth Barlett kernel. We follow equaton (1). In equaton (1) PHEt s real per capta health expendture PGDP t s real per capta gross domestc product and ut s error term. Table 13 contans OLS estmates the equaton (1) from 51

11 Are Health Expendture and GDP Contegrated: A Panel Analyss OECD data usng the natural logarthm of real per capta health expendture (PHE t ) as the dependent varable. All varable consdered are I(0). The null hypothess of no frst or second order autocorrelaton could not be rejected n regresson. Accordng to the OLS estmates coeffcent estmated of ncome elastcty for PHE s statstcally (1%) s dfferent from one and below unty mplyng health care expendture s a necessty good. Further per capta GDP ( PGDP t ) explans about 77% (adjusted R-square) of the varaton n per capta health expendtures ( PHE ). Ths result s consstent wth some prevous studes. t Table 11 Kao resdual contegraton test T stat Prob val. ADF Resdual varance HAC varance Note: Trend assumpton: no determnstc trend lag selecton: automatc AIC wth a max lag of 6 and Newey-West bandwth selecton wth Barlett kernel. Table 12 Johansen-fsher panel contegraton results Number of contegratng vectors Fsher stat. from trace stat. Prob. Fsher stat. from max. egen test Prob. r r Note: Trend assumpton: Lnear determnstc trend (restrcted). EVews6 computes probabltes usng asymptotc Ch-square dstrbuton. Lag length s equal to 1. Table 13 Results of OLS estmaton technque Varable Coeffcent Std. error t-stat Prob. C Log (PGDP) Concluson In ths study we examned the long-run relatonshp between per capta health care expendtures and per capta GDP n a sample of OECD countres. We appled the Johansen multvarate contegraton technque to nvestgate the contegratng relatonshp between per capta health expendtures and per capta GDP n OECD countres selected durng the perod. Frstly we appled the frst generaton panel unt root tests second generaton panel unt root test and Carron- Slvestre et al. s (2005) panel statonary test wth structural breaks (PANKPSS). We fnd that all of the seres are found as ntegrated of order one I (1). Then we performed the contegraton analyses. As a result we fnd evdence for one contegratng relatonshp between the health care expendtures and PGDP. That s there s a long-run relatonshp among the consdered seres. As can be seen from obtaned emprcal results governments must be focused on ther health care system and must research n drecton of makng more effcency ther health care system. After obtaned all these fndng we nvestgate whether health care expendture s luxury good. As a result we fnd that health care expendture s a necessty good for 18 OECD countres selected. References: Ba J. and Perron P. (1998) Estmatng and testng lnear models wth multple structural changes Econometrca Vol. 66 No. 1 pp Ba J. and Perron P. (2001) Computaton and analyss of multple structural change models Journal of Appled Econometrcs Vol. 18 No. 1 pp

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