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The Direction of Causality between Health Spending and GDP: The Case of Pakistan

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  • Haider, Adnan
  • Butt, M. Sabihuddin

Abstract

Relevant literature suggests that the most important determinant of health care spending is real GDP. Moreover, there is considerable evidence that health care spending rises at a faster rate than real GDP. This paper uses recently developed tests for the existence of a long run relationship to analyze the links between health care spending and GDP. We are, particularly, interested in estimating the elasticity parameter. The aim of the paper is to provide a new method of analysis to those used in recent papers on this subject. Typically in applied analysis, testing for the existence of cointegration and causality can only be carried out once the time series properties of the data have been established. For example, tests for cointegration require the variables to integrated of the same order, typically I(1), prior to estimation. By eliminating the need for unit root pre-testing, the tests applied here considerably simplify the inference procedure. They also reduce the potential for distortions in the inference due to the unknown properties of the testing sequence. Our findings include robust evidence that, for Pakistan, the income elasticity for health care spending is greater than one and that the elasticity value is stable over the estimation period.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23379.

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Date of creation: 15 Aug 2006
Date of revision: 05 Dec 2006
Publication status: Published in Pakistan Economic and Social Review 1.45(2007): pp. 125-140
Handle: RePEc:pra:mprapa:23379

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Keywords: Health Spending; GDP; Causality;

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  1. Jennifer Roberts, 1999. "Sensitivity of elasticity estimates for OECD health care spending: analysis of a dynamic heterogeneous data field," Health Economics, John Wiley & Sons, Ltd., vol. 8(5), pages 459-472.
  2. Blomqvist, A.G. & Carter, R.A.L., 1993. "Is Health Care Really a Luxury?," UWO Department of Economics Working Papers 9311, University of Western Ontario, Department of Economics.
  3. M Pesaran & Yongcheol Shin & Richard J Smith, 2004. "Bounds Testing Approaches to the Analysis of Long Run Relationships," ESE Discussion Papers 46, Edinburgh School of Economics, University of Edinburgh.
  4. McCoskey, Suzanne K. & Selden, Thomas M., 1998. "Health care expenditures and GDP: panel data unit root test results," Journal of Health Economics, Elsevier, vol. 17(3), pages 369-376, June.
  5. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
  6. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  7. Bewley, R. A., 1979. "The direct estimation of the equilibrium response in a linear dynamic model," Economics Letters, Elsevier, vol. 3(4), pages 357-361.
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