Generalized Cointegration: A New Concept with an Application to Health Expenditure and Health Outcomes

Stephen Hall, P. A. V. B. Swamy (swamyparavastu@hotmail.com) and George Tavlas

No 11/22, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: We propose a new generalization of the concept of cointegration that allows for the possibility that a set of variables are involved in an unknown nonlinear relationship. Although these variables may be unit-root non-stationary, there exists a nonlinear combination of them that takes account of such non-stationarity. We then introduce an estimation technique that allows us to test for the presence of this generalized cointegration in the absence of knowledge as to the true nonlinear functional form and the full set of regressors. We outline the basic stages of the technique and discuss how the issue of unit-root non-stationarity and cointegration affects each stage of the estimation procedure. We then apply this technique to the relationship between health expenditure and health outcomes, which is an important but controversial issue. A number of studies have found very little or no relationship between the level of health expenditure and outcomes. In econometric terms, if there is such a relationship then there should exist a cointegrating relationship between these two variables and possibly many others. The problem that arises is that we may be either unable to measure these other variables or that we do not know about them, in which case we may incorrectly find no relationship between health expenditures and outcomes. We then apply the concept of generalized cointegration; we obtain a highly significant relationship between health expenditure and health outcomes.

Keywords: Generalized cointegration; non-stationarity; time-varying coefficient model; coefficient driver (search for similar items in EconPapers)
JEL-codes: C13 C19 C22 (search for similar items in EconPapers)
Date: 2011-03
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-hea
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Citations: View citations in EconPapers (2)

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Journal Article: Generalized cointegration: a new concept with an application to health expenditure and health outcomes (2012)
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