Abstract
In this article, we propose a model selection approach for testing structural breaks in a semiparametric panel varying coefficient model. Monte Carlo evidence shows that the proposed model selection approach performs well in finite sample settings. Applying the method to an empirical data, we find evidence of structural breaks in Organisation for Economic Co-operation and Development (OECD) health expenditure data by allowing for income elasticity to be state (income)-dependent. The relationship between health expenditure and income is subject to two types of structural changes: smooth changes over income and structural breaks in the time dimension. The findings hold for both foreign exchange rate-converted and Purchasing Power Parity-converted expenditure and GDP.
Article PDF
Similar content being viewed by others
Avoid common mistakes on your manuscript.
References
Ahmad I, Leelahanon S, Li Q (2005) Efficient estimation of a semiparametric partially linear varying coefficient model. Ann Stat 33: 258–283
Andrews DWK, Lee I, Ploberger W (1996) Optimal change point test for normal linear regression. J Econom 70: 9–38
Bai J, Perron P (1998) Estimating and testing linear models with multiple structural changes. Econometrica 66: 47–78
Bai J, Perron P (2006) Multiple structural change models: a simulation analysis. In: Corbea D, Durlauf S, Hansen BE (eds) Econometric theory and practice: frontiers of analysis and applied research. Cambridge University Press, Cambridge, pp 212–237
Cai Z, Kuan CM(2005) Nonparametric modeling for conditional capital asset pricing models (Unpublished manuscript)
Cai Z, Fan J, Yao Q (2000a) Functional-coefficient regression models for nonlinear time series. J Am Stat Assoc 95: 941–956
Cai Z, Fan J, Li R (2000b) Efficient estimation and inferences for varying-coefficient models. J Am Stat Assoc 95: 888–902
Carrion-i-Silvestre JL (2005) Health care expenditure and GDP: are they broken stationary?. J Health Econ 24: 839–854
Chou SY, Liu JT, Huang CJ (2004) Health insurance and savings over the life cycle—A semiparametric smooth coefficient estimation. J Appl Econom 19: 295–322
Di Matteo L (2003) The income elasticity of health care spending: a comparison of parametric and nonparametric approaches. Eur J Health Econ 4: 20–29
Di Matteo L (2005) macro determinants of health expenditure in U.S. and Canada: assessing the impact of income, age distribution and time. Health Policy 71: 23–42
Fan J, Huang T (2005) Profile likelihood inferences on semi-parametric varying-coefficient partially linear models. Bernoulli 11: 1031–1057
Gerdtham UG, Jönsson B (2000) International comparisons of health expenditure: theory, data and econometric analysis. In: Culyer AJ, Newhouse JP (eds) Handbook of health economics, vol 1A, Chap 1. Elsevier Sciences, Amsterdam, pp 11–53
Hall RE, Jones CI (2007) The value of life and the rise in health spending. Q J Econ 122: 39–72
Hastie TJ, Tibshirani RJ (1999) Generalized additive models. Chapman & Hall/CRC, London
Hitiris T, Posnett J (1992) The determinants and effects of health expenditure in developed countries. J Health Econ 11: 173–181
Hurvich CM, Simonoff JS, Tsai CL (1998) Smoothing parameter selection in nonparametric regression using an improved Akaike information criterion. J R Stat Soc Ser B 60: 271–293
Hurvich CM, Tsai CL (1989) Regression and time series model selection in small samples. Biometrika 76: 297–307
Jansen DW, Li Q, Wang Z, Yang J (2008) Fiscal policy and asset markets: a semiparametric analysis. J Econom 147: 141–150
Jewell T, Lee J, Tieslau M, Strazicich MC (2003) Stationarity of health expenditures and GDP: evidence from panel root tests with heterogeneous structural breaks. J Health Econ 22: 313–323
Li Q, Huang C, Li D, Fu T (2002) Semiparametric smooth coefficient models. J Bus Econ Stat 20: 412–422
Li Q, Wang S (1998) A simple consistent bootstrap test for a parametric regression function. J Econom 87: 145–165
Liu RY (1988) Bootstrap procedures under some non i.i.d. models. Ann Stat 16: 1696–1708
Liu J, Wu S, Zidek JV (1997) On segmented multivariate regressions. Stat Sin 7: 497–525
Narayan PK (2006) Examining structural breaks and growth rates in international health expenditures. J Health Econ 25: 877–890
Newhouse JP (1992) Medical care costs: how much welfare loss?. J Econ Perspect 6: 3–21
OECD (2006) Projecting OECD health and long-term care expenditures: What are the main drivers? OECD Economics Department working papers, No. 477, OECD Publishing, Paris
Okunade AA, Murthy VNR (2002) Technology as a ‘major driver’ of health care costs: a cointegration analysis of the Newhouse conjecture. J Health Econ 21: 147–159
Perron P (2006) Dealing with structural breaks. In: Patterson K, Mills TC (eds) Palgrave handbook of econometrics, vol 1: econometric theory. Palgrave Macmillan, New York, pp 278–352
Pesaran MH, Timmermann A (2007) Selection of estimation window in the presence of breaks. J Econom 137: 134–161
Rettenmaier AJ, Wang Z (2006) Persistence in medicare reimbursements and personal medical accounts. J Health Econ 25: 39–57
Robinson PM (1988) Root-n-consistent semiparametric regression. Econometrica 56: 931–954
Technical Review Panel on the Medicare Trustees Reports. Review of assumptions and methods of the Medicare Trustees’ Financial Projections. December 2004, Washington DC
Ullah A (1985) Specification analysis of econometric models. J Quant Econ 1: 187–209
Wang Z (2006) The joint determination of the number and the type of structural changes. Econ Lett 93(2): 222–227
Yao YC (1988) Estimating the number of change-points via Schwarz’ criterion. Stat Prob Lett 6: 181–189
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Liu, D., Li, R. & Wang, Z. Testing for structural breaks in panel varying coefficient models: with an application to OECD health expenditure. Empir Econ 40, 95–118 (2011). https://doi.org/10.1007/s00181-010-0375-6
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00181-010-0375-6