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.
Highlights
Panel data analysis has received a growing attention during the last two decades due to its suitability for a wide number of applied disciplines, such as economics, finance and biology
This paper extends the work of Phillips et al (2017) to panel data and it proposes a non-linear cointegration model with time-varying coefficients and fixed effects
This differs from the results of Hitiris and Posnett (1992) who use a pooled estimator for panel data with two dummy variables to mimic αi in model (29) and obtains values of βover 1
Summary
Panel data analysis has received a growing attention during the last two decades due to its suitability for a wide number of applied disciplines, such as economics, finance and biology. Phillips (2001) provide a review on the development and challenges on trends modelling which is often impossible to be explained by parametric models In this regard, extensive literature focuses on time-varying coefficient trending models using nonparametric and semi-parametric estimation methods. Phillips et al (2017) study non-linear cointegration models in which the structural coefficients may evolve smoothly over time, giving two different limit distributions with different convergence rates in the different directions of the functional parametric space. Both rates are faster than the usual root-nh rate
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