A note on power comparison of panel tests of cointegration – An application on health expenditure and GDP

This paper presents a comparison of power of panel tests of cointegration and show how the choice of most powerful test depends on the values of the sample statistics. Country-by-country and panel stationarity and cointegration tests are performed using a panel of 20 OECD countries observed over the period 1971-2004. Residual-based tests and a cointegration rank test in the system of health care expenditure and GDP are used to test cointegration. Asymptotic normal distribution of these tests allows a straightforward comparison: for some values of the sample statistics, residual-based and rank tests are not directly comparable and the power of residual-based tests oscillates, while for other values rank test is more powerful than residual-based tests. In conclusion, a clear-cut conclusion on the most powerful test cannot be reached. JEL classification: C12; C22; C23; I10