Multivariate Granger causality and the dynamic relationship between health spending, income, and health price in Malaysia

Tang, Chor Foon (2010): Multivariate Granger causality and the dynamic relationship between health spending, income, and health price in Malaysia.

Abstract

This study employs the Granger causality test within a multivariate cointegration and error-correction framework to investigate the relationship between health spending, income, and health price in Malaysia. This study covers the annual sample from 1970 to 2009. The main findings of this study are that in the short-run there is uni-directional Granger causality running from health spending and health price to income in Malaysia. While, in the long-run health spending, income and health price are bi-directional Granger causality. In addition, we also extend the study to examine the dynamic interaction between the variables in the system through the forecast error variance decomposition and impulse response function analyses. In line with the finding of Granger causality, all the variables behaved endogenously in the long-run. Thus, the variables are Granger-causes each other in the long-run even there might be deviations in the short-run.

• Item Type: MPRA Paper
• Language: English
• Keywords: Causality, Cointegration; Health spending; Growth; Malaysia
• Subjects: H - Public Economics > H5 - National Government Expenditures and Related Policies > H51 - Government Expenditures and Health; I - Health, Education, and Welfare > I1 - Health > I18 - Government Policy ; Regulation ; Public Health; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics

References

Anonymous (2009) Healthcare expenditure in Malaysia increasing, Bernama, August, August 5th 2009.

Asian Development Bank (2006) Key Indicators 2006: Measuring Policy Effectiveness in Health and Education. Asian Development Bank

Athukorala, P. and Sen, K. (2002) Saving, Investment, and Growth in India. Oxford University Press, Oxford.

Blomqvist, A.G. and Carter, R.A.L. (1997) Is health care really a luxury? Journal of Health Economics, 16(2), pp. 207-229.

Cheung, Y.W. and Lai, K.S. (1993) Finite-sample sizes of Johansen’s likelihood ratio tests for cointegration. Oxford Bulletin of Economics and Statistics, 55(3), pp. 313-328.

Cole, M.A. and Neumayer, E. (2006) The impact of poor health on total factor productivity. Journal of Development Studies, 42(6), pp. 918-938.

Deaton, A.S. (1989) Saving in developing countries: Theory and review. In: Proceedings of the World Bank Annual Conference on Development Economics 1989 (Eds) S. Fischer and D. de Tray, World Bank, Washington, D.C., pp. 61-108.

Devlin, N. and Hansen, P. (2001) Health care spending and economic output: Granger causality. Applied Economics Letters, 8(8), pp. 561-564.

Engle, R.F. and Granger, C.W.J. (1987) Co-integration and Error Correction: Representation, Estimation and Testing. Econometrica, 55(2), pp. 251-276.

Gerdtham, U. and Löthgren, M. (2000) On stationary and cointegration of international health expenditure and GDP. Journal of Health Economics, 19(4), pp. 461-475.

Granger, C.W.J. (1986) Development in the study of co-integrated economic variables. Oxford Bulletin of Economics and Statistics, 48(3), pp. 213-228.

Granger, C.W.J. and Newbold, P. (1974) Spurious regression in econometrics. Journal of Econometrics, 2(2), pp. 111-120.

Grossman, M. (1972) On the concept of health capital and the demand for health. Journal of Political Economy, 80(2), pp. 223-255.

Hall, S.G. (1991) The effect of varying length VAR models on the maximum likelihood estimates of cointegrating vectors. Scottish Journal of Political Economy, 38(4), pp. 317-323.

Hallam, D. and Zanoli, R. (1993) Error correction models and agricultural supply response. European Review of Agricultural Economics, 20, pp. 151-166.

Hansen, P. and King, A. (1996) The determinants of health care expenditure: A cointegration approach. Journal of Health Economics, 15(1), pp. 127-137.

Hartwig, J. (2008) What drives health care expenditure? – Baumol’s model of ‘unbalanced growth’ revisited. Journal of Health Economics, 27(3), pp. 603-623.

Hitiris, T. and Posnett, J. (1992) The determinants and effects of health expenditure in developed countries. Journal of Health Economics, 11(2), pp. 173-181.

Johansen, S. (1988) Statistical analysis of cointegrating vector. Journal of Economic Dynamics and Control, 12(2-3), pp. 231-255.

Johansen, S. and Juselius, K. (1990) Maximum likelihood estimation and inference on cointegration with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), pp. 169-210.

Kapetanios, G. (2005) Unit-root testing against the alternative hypothesis of up to m structural breaks. Journal of Time Series Analysis, 26(1), pp. 123-133.

Lean, H.H. and Tang, C.F. (2010) Is the tourism-led growth hypothesis stable for Malaysia? A note. International Journal of Tourism Research, 12(4), pp. 375-378.

Liew, K.S. (2004) Which lag length selection criteria should we employed? Economics Bulletin, 3, pp. 1-9.

Lütkepohl, H. (1982) Non-causality due to omitted variables. Journal of Econometrics, 19, pp. 367-378.

Lütkepohl, H. (2005) New Introduction to Multiple Time Series Analysis. Springer-Verlag, Germany.

MacKinnon, J.G. (1996) Numerical distribution functions for unit root and cointegration tests. Journal of Applied Econometrics, 11(6), pp. 601-618.

Mushkin, S.J. (1962) Health as an investment. Journal of Political Economy, 70(5), pp. 129-157.

Nelson, C.R. and Plosser, C.I. (1982) Trends and random walks in macroeconomic time series: Some evidence and implications. Journal of Monetary Economics, 10(2), pp. 139-162.

Obben, J. (1998) The demand for money in Brunei. Asian Economic Journal, 12(2), pp. 109-121.

Parkin, D., McGuire, A. and Yule, B. (1987) Aggregate health care expenditures and national income: Is health care a luxury goods? Journal of Health Economics, 6(2), pp. 109-127.

Perron, P. (1989) The great crash the oil price shock and the unit root hypothesis. Econometrica, 57, pp. 1361-1401.

Pesaran, M.H., Shin, Y. and Smith, R.J. (2001) Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), pp. 289-326.

Phillips, P.C.B. (1986) Understanding spurious regression in econometrics. Journal of Econometrics, 33(3), pp. 311-340.

Ramesh, M. and Asher, M. (2000) Welfare Capitalism in Southeast Asia: Social Security, Health, and Education Policies in Indonesia, Malaysia, the Philippines, Singapore and Thailand. Basingstoke: Macmillan.

Ramesh, M. and Wu, X. (2008) Realigning public and private health care in Southeast Asia. The Pacific Review, 21(2), pp. 171-187.

Reimers, H.E. (1992) Comparison of tests for multivariate cointegration. Statistical Papers, 33(1), pp. 335-359.

Samudram, M., Nair, M. and Vaithilingam, S. (2009) Keynes and Wagner on government expenditures and economic development: The case of a developing economy. Empirical Economics, 36(3), pp. 697-712.

Sims, C. (1980) Macroeconomics and reality. Econometrica, 48, pp. 1-48.

Solow, R. (2001) Applying growth theory across countries. World Bank Economic Review, 15(2), pp. 283-288.

Tang, C.F. (2008) Wagner’s law versus Keynesian hypothesis: New evidence from recursive regression-based causality approaches. ICFAI Journal of Public Finance, 6(4), pp. 29-38.

Tang, C.F. (2009) An examination of the government spending and economic growth nexus for Malaysia using the leveraged bootstrap simulation approach. Global Economic Review, 38(2), pp. 215-227.

Tang, C.F. and Evan Lau, P.H. (2008) Wagner versus Keynes hypotheses: Disaggregated public expenditure and income for Malaysia. In: Proceedings of the 3rd International Borneo Business Conference 2008, Kota Kinabalu, Sabah, Universiti Malaysia Sabah, pp. 286-296.

Wang, Z.J. and Rettenmaier, A.J. (2007) A note on cointegration of health expenditures and income. Health Economics, 16(6), pp. 559-578.

WHO (2000) World Health Report 2000: Health systems improving performance, World Health Organisation.

Zivot, A. and Andrew, D.W.K. (1992) Further evidence on the great crash the oil shock and the unit root hypothesis. Journal of Business and Economic Statistics, 10, pp. 251-270.