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Health Care Spending and Economic Growth: Armey-Rahn Curve in a Panel of European Economies

Trofimov, Ivan D. (2020): Health Care Spending and Economic Growth: Armey-Rahn Curve in a Panel of European Economies.

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Abstract

The paper examines the Armey-Rahn hypothesis of the inverted U-shaped relationship between public health care expenditure and economic growth in the European economies over the 1995-2018 period. To this end, the aggregate production function (in levels or logarithms) augmented by spending and economic openness terms is estimated. The fixed-effects panel regression, the panel quantile regression with fixed effects, and the panel ARDL models are used for empirical analysis. The paper unequivocally indicates the existence of the Armey-Rahn curve and the negative effects of health care spending on the output (per capita) beyond the optimal spending level. Irrespective of the functional form of the model or the definition of dependent or independent variables, the optimal level was estimated to be smaller than the actual average health care spending level for the period (5.99% of GDP), indicating the over-provision of public health care. Under-provision of public health care was documented for the transition economies in Eastern Europe (that were characterised by comparatively small size of GDP, low per capita output and higher optimal spending levels, economic transition challenges, and lagging health care spending, in addition to indivisibilities of the public health investment).

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