Modelling Time-Varying Income Elasticities of Health Care Expenditure for the OECD

Abstract

Income elasticity dynamics of health expenditure is considered for the OECD and the Eurozone over the period 1995-2014. This paper studies a novel non-linear cointegration model with fixed effects, controlling for cross-section dependence and unobserved heterogeneity. Most importantly, its coefficients can vary over time and its variables can be non-stationary. The resulting asymptotic theory is fundamentally different with a faster rate of convergence to similar kernel smoothing methodologies. A fully modified kernel regression method is also proposed to reduce the asymptotic bias. Results show a steep increase in the income elasticity for the OECD and a small increase for the Eurozone.

Keywords: Cross-Sectional Dependence, Health Expenditure, Income Elasticity, Nonparametric Kernel Smoothing, Non-Stationarity, Super-Consistency

JEL Classification: C14, C23, G13, H51