Pakistan Economic and Social Review

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 pretesting, 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. *The authors are, respectively, Research Analyst, Monetary Policy Department, State Bank of Pakistan, Karachi ([email protected]) and Senior Research Economist/ Associate Professor of Economics, Applied Economics Research Centre, University of Karachi, Karachi (Pakistan) ([email protected]). Note: The views expressed in this working paper are the authors’ personal views and do not necessarily reflect those of the State Bank of Pakistan. The authors of this paper welcome comments and suggestions. 126 Pakistan Economic and Social Review