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A Nonl i near Approach t o Test i ng t he Uni t Root
Nul l Hypot hesi s: An Appl i cat i on t o
Int ernat i onal Heal t h Expendi t ures

Paresh Kumar Narayan and St ephan Popp
The working papers are a series of manuscripts in their draft form. Please do not
quote without obtaining the authors consent as these works are in their draft form.
The views expressed in this paper are those of the author and not necessarily
endorsed by the School or IBISWorld Pty Ltd.

A Nonlinear Approach to Testing the Unit Root
Null Hypothesis: An Application to
International Health Expenditures
Paresh Kumar Narayan, School of Accounting,
Economics and Finance, Deakin University.
Stephan Popp, Department of Economics,
University of Duisburg-Essen, Germany.
Abstract
In this paper, we examine the unit root null hypothesis for per capita
total health expenditures, per capital private health expenditures, and per
capital public health expenditures for 29 OECD countries. The novelty
of our work is that we use a new nonlinear unit root test that allows for
one structural break in the data series. We nd that for around 45 per
cent of the countries we are able to reject the unit root hypothesis for
each of the three health expenditure series. Moreover, using Monte Carlo
simulations, we show that our proposed unit root model has better size
and power properties than the widely used ADF and LM type tests.
1 Introduction
Over the last decade there has been a surge in research on the time series prop-
erties of health expenditures (HE). One traditional branch of health economics
research has focused on testing the unit root null hypothesis in health expen-
diture. Recent contributions to health economics research include examining
common structural breaks in health expenditures (Narayan, 2006), convergence
of health expenditures (Narayan, 2007; Hitiris, 1997; Barros, 1998), and relative
1
importance of permanent and transitory shocks in explaining health expendi-
tures (Narayan and Narayan, 2008).
In this paper, we do not contribute a new topic to health economics, rather
we revisit the unit root null hypothesis for health expenditures. Our work
here, however, is novel on three fronts. First, we examine the unit root null
hypothesis for health expenditures by using a new nonlinear unit root test. It
should be noted that in this literature, a nonlinear unit root test has not been
used previously. This is an important contribution because, as we show later in
the paper, based on Monte Carlo simulations, our new unit root test outperforms
the conventional augmented Dickey and Fuller (ADF) and Lagrange Multiplier
(LM) type tests used to study health expenditures. In other words, we show
that the nonlinear test we use has superior size and power properties. The
only work that comes closest to our work is Narayan (2008), who examines
evidence of asymmetric behaviour of per capita health expenditures. He uses
the nonparametric Triples test and nds some evidence of asymmetric behaviour
in per capita health expenditures.
Second, we depart from the tradition of testing for a unit root in total health
expenditures. Our empirical analysis is based on three health expenditure series:
total per capita health expenditure, private per capita health expenditure, and
public per capita health expenditure. The importance of considering this is
sensible in light of the fact that the health care system in OECD countries
diers, based on some combination of private and public funded health care,
but with dierent weights for each.
2
Our third contribution is that we study a wide range of OECD countries
(29 countries) and drawing on the new OECD health dataset ensure that our
time series sample is most up-to-date, allowing us to capture the more recent
developments in health care systems in these countries. This is important, since
recent developments (in terms of innovations and policies) can potentially be a
source of structural breaks, which have implications for unit root testing.
We organise the rest of the paper as follows. In the next section, we discuss
the reasons why it is important to test for unit roots in health expenditures. In
section 3, we present our nonlinear unit root test and explain the Monte Carlo
design used to conduct size and power properties. In section 4, we discuss the
data and results, including a comparison of the small sample performance of our
test vis-a-vis the ADF type tests with and without a structural break and the
minimum LM unit root test proposed by Lee and Strazicich (2004). In section
5, we provide some concluding remarks.
2 Importance of the unit root null hypothesis
While testing the unit root null hypothesis in health expenditures dates back
over two decades, dating from the work of Hansen and King (1996), and in
this sense it is a traditional research topic, there is lack of understanding on the
motivations for testing a unit root null hypothesis. As we will see below there are
both economic (theoretical) as well as econometric modelling motivations behind
this exercise, yet the absence of this understanding in the health economics
3
literature implies that testing the unit root null hypothesis is purely a statistical
exercise. In this section, we attempt to dispel this view and make clear the
motivation for unit root testing.
There are three main reasons for the importance of testing the unit root
null hypothesis. First, this hypothesis test proers knowledge on whether a
shock has a permanent or a transitory eect on health expenditures. When
one rejects the unit root null, thus accepting the alternative hypothesis that
there is no unit root, it implies that either the series is mean reverting or trend
reverting. In other words, a series is deemed stationary when the unit root null
is rejected. For a stationary health series, the implication is as follows. Over
the time period for which the null was rejected, any health policies and any
macroeconomic news, such as changes in interest rates and/or exchange rates,
are interpreted to have a transitory eect on the health expenditure series.
This has implications for business cycles. The way this works is as follows.
One branch of research has shown that as income increases health expenditures
also tend to increase. In other words, there is clear empirical evidence that
a positive association exists between per capita income and per capita health
expenditures. Since the transitory component of income (or its growth rate or
rst dierence) follows a cyclical pattern, depicting economic expansions and
contractions, it follows that a similar pattern of expansions and contractions
are likely for the health expenditure series.
Second, the unit root null hypothesis has direct implications for the health
expenditure convergence hypothesis. For instance, Narayans (2007) conver-
4
gence hypothesis - whereby economies with low levels of health expenditures
catch-up over time with economies with high levels of health expenditures - is
by construction stochastic. This means that in a time series framework the
dierence in health expenditures between any two countries should not contain
a unit root. In other words, if the unit root null is accepted, then there is no
convergence of health expenditures.
Third, the unit root hypothesis has clear implications for econometric mod-
elling. For example, one branch of the health economics literature has examined
the long-run relationship (cointegration) between health expenditure and GDP.
In testing for cointegration, a pre-requisite is that both variables contain a unit
root; in other words, accepting the null hypothesis is a rst step toward con-
ducting a test for a long-run relationship. Failure to accept the null hypothesis
would only imply that health expenditures share a short-term relationship with
GDP.
In a related recent study, Narayan and Narayan (2008) examine short-run co-
movement (common cycles) and long-run co-movement (common trends) among
health expenditures. Their work suggests that one can only search for common
cycles among stationary health expenditures and common trends among non-
stationary health expenditures. So, a test for common cycles and common trends
(whose motivations are explained in Narayan and Narayan, 2008), requires as a
pre-requisite, a test for the unit root null hypothesis.
5
3 Econometric Methodology
3.1 Nonlinear unit root test
We apply the nonlinear unit root test proposed by Popp (2008b). The test is
based on the following DGP allowing for a smooth break in level and trend:
j
t
= c + ,t + (1) (01l
0
t
+ 1T
0
t
) + n
t
, (1)
n
t
= jn
t1
+ -
t
, (2)
-
t
= (1)c
t
, c
t
iid(0, o
2
e
), (3)
where 1l
0
t
= 1(t T
0
B
) and 1T
t
= 1(t T
0
B
)(t T
0
B
), 1(.) being the indicator
function and T
0
B
symbolizing the true break date. The parameters 0 and
indicate the magnitude of the level and slope break, respectively. It is assumed
that all roots of the lag polynomial (1) lie outside the unit circle.
The reduced form of the structural model serves then as test regression and
has the following form:
j
t
= jj
t1
+ c

+ ,

t + 1(T
B
)
t
+ i1l
t1
+ 1T
t1
+ c
t
(4)
with
c

= c(1 j) +,j, ,

= ,(1 j), = ( +0), i = ( c0) and = c. (5)

This model allows for a break in level and slope for trending data and is de-
6
noted model 2 (M2). To restrict the test to a break in level for trending data
(henceforth model 1, M1) we set = 0 in equation (1) and in the test regression
(4). The null hypothesis j = 1 of a unit root against the alternative hypothesis
jjj < 1 is tested using the pseudo t-statistic of ^ j.
The form of the test regression is similar to the one used by Perron (1997) and
Popp (2008a) with the dierence that the regression equation (4) is nonlinear in
the relevant coecients 0, and j. Taking the restrictions in (5) into account
by estimating equation (4) using nonlinear least squares as described in Popp
(2008b) leads to ecient estimation of the coecients and increases the power
of the unit root test.
The estimate of the unknown break date is that point in time for which the
absolute t-value of
^
is maximised:
^
T
B
= arg max
T
B
jt
^

(T
B
)j. (6)
The tests by Perron (1997) and Popp (2008a) dier in the way they choose
the break date. While Perron selects that point in time for which the absolute
t-value of the coecient of the slope dummy 1T
t
is maximized, Popp focuses on
the absolute t-value of the coecient of the impulse dummy 1(T
B
)
t
as displayed
in equation (6). A feature of both tests is that they permit a break under both
the null and the alternative hypotheses. This is in contrast to the test by Zivot
and Andrews (ZA, 1992), which only allows for a break under the alternative.
Lee and Strazicich (2001) show that the ADF-type tests proposed by Perron
7
(1997) and ZA (1992) exhibit spurious rejections when a break occurs under
the null hypothesis. Because they assign this shortcoming to the general design
principle of the ADF-tests, they follow a dierent route by generalizing the LM
unit root test of Schmidt-Phillips (1992) to structural breaks. But as shown by
Popp (2008a), this is not a common feature of all ADF-type unit root tests and
also not of the nonlinear unit root test.
3.2 Monte Carlo design
We generate the data to calculate the critical values and conduct the size and
power analysis for models 1 and 2 according to equations (1) to (3) by using
GAUSS version 8.0. All simulations are based on 10,000 replications of c
t

iid(0, 1) each with T + 50 observations. Afterwards, we discard the rst 50
observations to avoid any eect of the initial condition. To keep the simulations
as concise as possible, we restrict our analysis to the case of a break fraction
`
0
= T
0
B
,T of 0.5. We further assume (1) = 1 for the simulations, which
means that the break takes eect abruptly. The trimming factor t is always
0.2 which means that we search for the break between the 20 and 80 percent
quantile of the total sample, i.e. T
B
2 [0.2T, 0.8T].
The critical values are computed for j = 1 and T = 10, 20, 30, 40 and
50 under the assumption that no break has occured, i.e. 0 = 0 for model 1
and 0 = = 0 for model 2, based on equation (1). Critical values for further
sample sizes can be found in Popp (2008b). The size and power properties are
calculated for j = 1 and j = 0.8, respectively. In order to assess the eect of
8
an increasing break magnitude to the test properties, we vary the level break
parameter 0 over the values 0, 3, 5 and 10 for model 1. For model 2, we consider
all combinations of the level break sizes 0 2 f0, 5, 10g and the slope break sizes
2 f0, 2, 6, 10g.
4 Data and empirical results
4.1 Data
We use three health expenditure data series obtained from the 2007 OECD
health database: total per capita health expenditure, public per capita health
expenditure, and private per capita health expenditure. For the empirical analy-
sis, all data are converted into natural logarithmic form. Public health expen-
diture is expenditure incurred by public funds by the state, regional and local
government bodies and social security schemes. By comparison private health
care expenditure includes private sources of funds, such as out-of-pocket ex-
penses (both over-the-counter and cost-sharing), private insurance programmes,
charities and occupational health care (OECD, 2007).
The three data series are in real values measured in local currencies. There
are two reasons we prefer to work with local currencies rather than some common
currency value, such as the US dollar. First, using local currency value ensures
that we avoid any biasness in unit root results emanating from the exchange rate
eect. The unit root test hypothesis, motivated by purchasing power parity, is
famous in international economics. Using a series based on say the US dollar
9
values, may mean that if one rejects (accepts) the null, this may be a result
of the fact that the exchange rate variable was stationary (non-stationary).
The second reason is that the health economics literature that uses US dollar
denominated expenditure series or PPP based series nd mixed results (see
results in Narayan, 2006). This conrms the earlier fear of distortionary eects.
It follows that it is more logical to work with domestic currencies.
The data series are plotted in Figures 1 and 2. We notice two features of
the data. First, a linear trend is observable in all the three series for all the
OECD countries. Second, for most of the series, at least one structural break is
also visible. In Table 1, we report the annual growth rates for the three health
expenditure series. We observe the following. First, for 19 out of the 29 OECD
countries the annual growth rate of total health expenditure, for 14 countries
the growth rate of public health expenditures, and for 12 countries the growth
rate of private health expenditures have been over 4 per cent per annum.
4.2 Results
4.2.1 Critical values
The critical values of our nonlinear unit root test for models 1 and 2 are reported
in Table 2. As explained earlier, we generate critical values for T = 10, 20, 30,
40, 50. It is shown in Popp (2008b) that the critical values of the nonlinear
test under the assumption of an unknown and endogenously determined break
date and those assuming a known break date both converge to the Dickey-
Fuller critical values with increasing sample size. For empirical application,
10
we recommend the use of the critical values for exogenously given break dates
because it leads to a test with empirical size close to nominal size when a break
is present and to a test with high power. These critical values will be used for
test decision and are displayed in Table 2.
4.2.2 Size and power properties
In this section, we compare the size and power properties of our nonlinear struc-
tural break unit root tests with existing one break unit root tests used in the
applied economics literature. In particular, we compare the performance of our
nonlinear test with the Zivot and Andrews (1992), Lee and Strazicich (2004),
Popp (2008a), and Perron (1997) one structural break unit root test. For the
sake of comparison, we also analyse the performance of the conventional Dickey
and Fuller (1979) test which does not allow for any structural breaks in the data
series. The aim of this comparison of the statistical performance of the tests is
to show the strength of our test relative to those that are already available.
The results for size and power are generated for both models 1 and 2. The
results are based on T = 30, 50, 100 and 0 = 0, 3, 5, 10. The results for
model 1 are reported in Table 3. We notice that the empirical size of the ADF
test is substantially undersized: with increasing break size and sample size,
the empirical size converges to zero. By comparison, the Perron (1997) and
the ZA (1992) tests are highly oversized with increasing break size. The LS
(2004) and Popp (2008a) tests, in contrast, have a nominal size close to the
empirical 5 per cent level for medium sized breaks; even for large sized breaks
11
when T 50, the size performance is relatively good. The size properties of
our proposed nonlinear test, reported in the last columns of Table 3, suggest
that the empirical size is close to the nominal 5 per cent level when a break is
present (0 0) even for small sample sizes, such as when T = 30.
In terms of power, all tests show that with increasing sample size the power
of the tests increases. Since our break date selection criteria is the same as
that used in Popp (2008a), the probability of detecting the true break is the
same as for the Popp (2008a) test. Hence, we compare our results directly with
Popp (2008a). It should be noted that the power of the nonlinear test is much
better than that for Popp (2008a). When compared with other tests, it is clear
that the nonlinear test detects structural breaks more accurately than existing
procedures.
The results for the size properties of model 2 are reported in Table 4. We
notice that the ADF and the Popp (2008a) tests are mostly undersized, while the
Perron (1997) and ZA (1992) tests are substantially oversized. The LS (2004)
test is undersized in most of the cases, but gets considerably oversized with
increasing slope break. The nonlinear test has stable size close to the nominal
5 per cent level. Equally important, the probability of detecting the true break
date is close to 100 per cent with the Popp (2008a) and the nonlinear test this
performance is signicantly superior to the rest of the one structural break test.
In terms of the power of model 2, displayed in Table 5, all tests show high
power but this power gain seems to have resulted from signicant oversizing.
The nonlinear test does not suer from this distortionary eect.
12
4.2.3 Unit root test results
We report the results from the total per capita health expenditure series in
Table 6. The results are obtained from two models: M1 and M2, as explained
earlier. The results are organised as follows: column 1 reports the list of coun-
tries, column 2 contains the sample size and the resulting number of time series
observations is provided in column 3, column 4 reports the test statistic from
M1 used to test the unit root null, columns 5 and 6 contain the break date and
the break fraction, while column 7 reports the optimal lag lengths. The results
from M2 are reported beginning column 8. The presentation of results for the
per capita public health expenditure and per capita private health expenditure
in Tables 7 and 8, respectively, are similarly organised.
Beginning with the M1 results from the per capita total health expenditure
series, we nd that the unit root null hypothesis is rejected at the 1 per cent
level for Austria, Belgium, the Netherlands, and Sweden, at the 5 per cent level
for Germany, Luxemburg, Portugal, Switzerland, and the UK, and at the 10
per cent level for Poland. In sum, the null hypothesis is rejected for 10 out of
the 29 countries in our sample.
Results obtained from the M2 model reveal that the unit root null hypothesis
is rejected at the 1 per cent level for Australia, the Czech Republic, and the
Netherlands, at the 5 per cent level for the UK, Spain, and Sweden, and at
the 10 per cent level for Portugal and Switzerland. In total, the unit root
null hypothesis from the M2 model is rejected for eight of the 29 countries.
Considering the results from both models, for 13 countries the unit root null is
13
rejected.
Turning to results obtained from the public health expenditure series shown
in Table 7, we nd that the M1 model is able to reject the unit root null
hypothesis at the 1 per cent level for Belgium, Hungary, Korea, Luxemburg, the
Netherlands, Spain, and Sweden, at the 5 per cent level for the Slovak Republic,
and at the 10 per cent level for Iceland, Italy, and Portugal. In sum, the unit
root null hypothesis is rejected for 11 out of 29 countries.
Results from the M2 model reveal that the unit root null hypothesis is re-
jected at the 1 per cent level for Hungary, Luxemburg, Spain, and Sweden, and
at the 5 per cent level for Iceland, Belgium and Mexico. Results from the M2
model reveal that the unit root null hypothesis can be rejected for seven out of
29 countries.
The results from the private health expenditure series are reported in Table
8. Results from M1 reveal that the unit root null hypothesis is rejected at the 1
per cent level for Canada, Ireland, Norway, and Poland, at the 5 per cent level
for Australia, Denmark, and Germany, and at the 10 per cent level for Iceland,
Japan, Portugal, and the UK. Taken together, the M1 model reveals that the
unit root null hypothesis is rejected for 11 out of 29 countries.
Results from M2 indicate that the unit root null hypothesis is rejected at
the 1 per cent level for Canada and Ireland, at the 5 per cent level for Iceland,
and at the 10 per cent level for Mexico and Germany. In all, for ve out of 29
countries the M2 model is able to reject the unit root null hypothesis.
In summary, we observe the following. Models M1 and M2 together reveal
14
that the unit root null hypothesis can be rejected at conventional levels of sig-
nicance for 13 out of 29 countries in the case of total health expenditure series,
for 12 out of 29 countries in the case of public health expenditures and for 11
out of 29 countries in the case of private health expenditures. In general, then,
there is evidence that for around 45 per cent of the countries the health expen-
diture series (total, private, and public) are stationary, while for just over half
of the sample the series are non-stationary.
4.2.4 Discussion of results
Table 9 provides a summary of the results relating to the rejection of the null
hypothesis for the three health expenditure series. There are at least two reasons
for the mixed results. First, the sample size of data diers by country and is
really dictated by data availability. Second, there is heterogeniety in terms of
health systems in these OECD countries. In terms of funding for health-care,
there is a considerable dierence in the amount of health-care expenditure across
the sample. At the top end, in the United States, Switzerland, Germany and
Belgium in 2005 health expenditure as a percentage of GDP was 15.3 per cent,
11.6 per cent, 10.3 per cent and 10.2 per cent respectively. By comparison, at the
bottom end, in Ireland and Finland in 2005 health expenditure as a percentage
of GDP was 7.5 per cent (OECD, 2007).
Another source of heterogeneity between countries is in the relative impor-
tance of public and private health funding. The public sector is the main source
of health funding in all OECD countries except Greece, Mexico and the United
15
States. However, private sector funding is more important in some OECD coun-
tries than others; see second last column of Table 1.
Narayan and Narayan (2008) examined permanent and transitory shocks in
health-care expenditure in Canada, Japan, Switzerland, the United Kingdom,
and the United States. They found that countries in which private funding
dominated health-care expenditure, such as in Canada and the United States,
were more likely to experience permanent or long-lasting shocks to health-care
expenditure. We do nd this to be the case for the USA, Turkey and Greece
where the role of the private sector is relatively high compared with the rest of
the OECD countries. For these three countries, we are unable to reject the unit
root null hypothesis for any of the three health expenditure series.
Narayan and Narayan (2008) found that for Japan and the United Kingdom,
which have well-established public sectors, transitory shocks were more likely; in
other words, health expenditure series for those countries dominated by public
spending should be stationary. This is so because it seems that public spending
of health care is less impacted by shocks in that shocks tend to have only short-
term eects. This reects, in large part, public expectations of a certain level of
health-care delivery. On the other hand, private sector health providers react to
shocks in a permanent way, implying that they make adjustments in response
to shocks, thus shocks end up having long-term eects. Our results to a large
extent support the Narayan and Narayan (2008) ndings.
16
5 Concluding remarks
The goal of this paper was to examine the unit root null hypothesis for health
expenditure series for OECD countries. The innovation of our work is threefold:
rst, we identify the motivation for undertaking a test for the unit root null
hypothesis; second, we depart from the tradition of testing the unit root null
hypothesis for only the per capita total health expenditure and consider per
capita private and public heath expenditures; and third, for the rst time in
this literature, we propose a nonlinear approach to modelling the unit root null
hypothesis. We study the size and power properties of our proposed nonlinear
structural break unit root test with a range of existing one break unit root tests
and conrm its statistically superior performance.
Our results suggest that the unit root null hypothesis can be rejected at
conventional levels of signicance for 13 out of 29 countries in the case of total
health expenditure series, for 12 out of 29 countries in the case of public health
expenditures and for 11 out of 29 countries in the case of private health expendi-
tures. In sum, then, there is evidence that for around 45 per cent of the countries
the health expenditure series (total, private, and public) are stationary, while
for the rest of the sample the series are non-stationary.
The main implications of our ndings are that for at least 45 per cent of the
OECD countries, shocks to health expenditures (either total, private or public)
have only a transitory eect. This means that shocks aect health expenditures
for only a short period of time. Given the positive link between per capita
incomes and per capita health expenditures, in recessions when income levels
17
fall a negative shock to health expenditures then health expenditures will
also fall. However, this fall in health expenditures is likely to be only for a short
period of time, a behaviour consistent with the business cycle. Our results
conrm this for at least 45 per cent of the countries. The second implication
of our nding is embedded in econometric modelling, particularly cointegration
analysis, where knowledge on the integrational properties of health expenditure
series is a pre-requisite for the choice of econometric models and estimation
techniques.
18
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20
Figure 1: Logarithms of total health expenditure (solid line), public health
expenditure (dashed line) and private health expenditure (dotted line) in 15
OECD countries
1980 2000
7
8
Australia
1980 2000
6
7
8
Austria
1980 2000
6
7
8
Belgium
1980 2000
6
7
8
Canada
1990 2000
7.5
10.0
Czech Republic
1980 2000
8
10
Denmark
1980 2000
6
7
8
Finland
1990 2000
6
7
8
France
1980 2000
6
7
8
Germany
1990 2000
6
7
Greece
1990 2000
10
12
Hungary
1980 2000
10
12
Iceland
1980 2000
6
8
Ireland
1990 2000
6
7
8
Italy
1980 2000
11
12
13
Japan
21
Figure 2: Logarithms of total health expenditure (solid line), public health
expenditure (dashed line) and private health expenditure (dotted line) in 15
OECD countries
1990 2000
12
14
Korea
1980 2000
5.0
7.5
Luxembourg
1990 2000
7
8
Mexico
1980 2000
6
7
8
Netherlands
1980 2000
5.0
7.5
NewZealand
1980 2000
7.5
10.0
Norway
1990 2000
4
6
8
Poland
1980 2000
4
6
8
Portugal
2000 2005
8
10
Slovak Republic
1980 2000
6
8
Spain
1980 2000
8
10
Sweden
1980 2000
8
9
Switzerland
1980 1990 2000
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23
Table 2: Critical values of nonlinear unit root test for small samples
Model 1 Model 2
T 1% 5% 10% 1% 5% 10%
10 -6.366 -4.661 -3.908 -8.507 -5.896 -5.003
20 -4.910 -3.952 -3.451 -5.759 -4.672 -4.180
30 -4.472 -3.688 -3.307 -5.272 -4.389 -3.961
40 -4.272 -3.591 -3.239 -5.021 -4.222 -3.827
50 -4.336 -3.615 -3.237 -4.932 -4.167 -3.794
24
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27
Table 6: Results of nonlinear one break unit root test for total health expendi-
ture in 30 OECD countries
Country Sample T t
M1
^
^
T
B
^
k t
M2
^
^
T
B
^
k
Australia 1971-2004 34 -2.646 1986 0.47 3 -5.800

1995 0.74 3
Austria 1970-2005 36 -6.951

1994 0.69 4 -2.044 1994 0.69 0

Belgium 1970-2005 36 -5.834

1978 0.25 4 -0.824 1978 0.25 0

Canada 1970-2005 36 -2.585 1994 0.69 1 -3.338 1994 0.69 1
Czech Republic 1990-2005 16 -2.885 1997 0.50 1 -7.730

1996 0.44 2
Denmark 1971-2005 35 -2.963 1988 0.51 0 -3.766 1988 0.51 0
Finland 1970-2005 36 -2.070 1992 0.64 0 -1.767 1992 0.64 0
France 1990-2005 16 -2.492 1997 0.50 0 -3.501 1996 0.44 0
Germany 1970-1990 21 -2.420 1981 0.57 0 -2.803 1981 0.57 0
Germany 1992-2005 14 -6.081

1998 0.50 3 -2.942 1998 0.50 0

Greece 1987-2005 19 -2.877 1995 0.47 0 -2.286 1998 0.63 3
Hungary 1991-2004 14 -0.556 1997 0.50 0 -2.896 1997 0.50 0
Iceland 1970-2005 36 -2.701 1978 0.25 3 -2.696 1976 0.19 1
Ireland 1970-2005 36 -1.601 1975 0.17 0 -2.031 1991 0.61 0
Italy 1988-2005 18 -2.547 1998 0.58 5 -1.474 1996 0.50 0
Japan 1970-2004 35 -1.722 1977 0.23 5 -1.960 1983 0.40 0
Korea 1983-2005 23 -1.980 1997 0.65 0 -1.833 1997 0.65 0
Luxembourg 1970-2005 36 -3.817

1987 0.50 3 -2.967 1986 0.47 0

Mexico 1990-2005 16 -1.088 1996 0.44 0 -3.030 1996 0.44 1
Netherlands 1972-2004 33 -5.263

1982 0.33 3 -5.594

1982 0.33 3
New Zealand 1970-2005 36 -3.105 1978 0.25 1 -2.446 1984 0.42 3
Norway 1970-2005 36 -3.110 1979 0.28 0 -2.788 1980 0.31 1
Poland 1990-2005 16 -3.903

1997 0.50 1 -3.665 1997 0.50 1

Portugal 1970-2005 36 -3.880

1983 0.39 0 -3.959

1979 0.28 0
Slovak Republic 1997-2005 9 0.058 2001 0.56 1 -3.624 2001 0.56 0
Spain 1970-2005 36 -2.317 1987 0.50 2 -4.849

1987 0.50 0
Sweden 1970-2005 36 -4.732

1990 0.58 3 -4.886

1990 0.58 3
Switzerland 1970-2005 36 -3.809

1990 0.58 0 -4.028

1990 0.58 0
Turkey 1982-2005 24 -2.040 1995 0.58 0 -2.056 1995 0.58 0
UK 1970-2005 36 -3.993

1981 0.33 2 -5.011

1991 0.61 2
USA 1970-2005 36 -1.614 1975 0.17 1 -1.594 1976 0.19 1
Note: */**/*** denotes signicance at the 10%/5%/1% level.
28
Table 7: Results of nonlinear one break unit root test for public health expen-
diture in 30 OECD countries
Country Sample T t
M1
^
^
T
B
^
k t
M2
^
^
T
B
^
k
Australia 1971-2004 34 -2.395 1976 0.18 0 -2.557 1983 0.38 0
Austria 1970-2005 36 -2.185 1994 0.69 0 -1.967 1994 0.69 0
Belgium 1995-2005 11 -8.792

1998 0.36 1 -7.425

2000 0.55 1
Canada 1970-2005 36 -2.008 1994 0.69 1 -2.503 1994 0.69 1
Czech Republic 1990-2005 16 -2.423 1996 0.44 0 -3.684 1996 0.44 3
Denmark 1971-2005 35 -2.259 1988 0.51 0 -1.329 1982 0.34 0
Finland 1970-2005 36 -2.021 1992 0.64 0 -1.644 1992 0.64 0
France 1990-2005 16 -2.404 1999 0.63 3 -3.158 1996 0.44 0
Germany 1970-1990 21 -3.490 1984 0.71 2 -2.877 1981 0.57 0
Germany 1992-2005 14 -1.241 1999 0.57 0 -2.559 1998 0.50 0
Greece 1987-2005 19 -3.380 1992 0.32 3 -3.153 1993 0.37 3
Hungary 1991-2004 14 -19.630

1997 0.50 3 -12.570

1997 0.50 3
Iceland 1970-2005 36 -3.574

1991 0.61 0 -4.466

1977 0.22 0
Ireland 1970-2005 36 -0.783 1981 0.33 0 -2.601 1996 0.75 1
Italy 1988-2005 18 -3.789

1993 0.33 0 -1.634 1995 0.44 3

Japan 1970-2004 35 -1.859 1977 0.24 0 -1.392 1977 0.24 0
Korea 1983-2005 23 -5.536

1993 0.48 2 -2.103 1990 0.35 0

Luxembourg 1975-2005 31 -6.830

1987 0.42 3 -5.856

1987 0.42 3
Mexico 1990-2005 16 -2.080 1995 0.38 3 -5.103

1996 0.44 2
Netherlands 1972-2002 31 -4.699

1977 0.19 3 -3.483 1993 0.71 2

New Zealand 1970-2005 36 -2.208 1984 0.42 0 -2.384 1986 0.47 0
Norway 1970-2005 36 -2.901 1997 0.78 2 -3.027 1997 0.78 2
Poland 1990-2005 16 -2.292 1995 0.38 0 -2.285 1997 0.50 0
Portugal 1970-2005 36 -3.575

1981 0.33 0 -2.667 1989 0.56 0

Slovak Republic 1997-2005 9 -5.880

2000 0.44 1 -4.095 2001 0.56 0

Spain 1970-2005 36 -5.276

1987 0.50 0 -5.116

1987 0.50 0
Sweden 1970-2005 36 -5.822

1990 0.58 3 -6.021

1990 0.58 3
Switzerland 1985-2005 22 -0.692 1995 0.50 0 1.080 1995 0.50 0
Turkey 1984-2005 22 -3.060 1993 0.45 1 -2.045 1995 0.55 0
UK 1970-2005 36 -1.483 1976 0.19 0 -3.322 1991 0.61 0
USA 1970-2005 36 -2.725 1988 0.53 1 -2.762 1990 0.58 1
Note: */**/*** denotes signicance at the 10%/5%/1% level.
29
Table 8: Results of nonlinear one break unit root test for private health expen-
diture in 30 OECD countries
Country Sample T t
M1
^
^
T
B
^
k t
M2
^
^
T
B
^
k
Australia 1971-2004 34 -3.841

1983 0.38 0 -3.682 1983 0.38 0

Austria 1970-2005 36 -2.337 1980 0.31 0 -3.485 1980 0.31 0
Belgium 1995-2005 11 -3.500 1999 0.45 0 -3.142 2000 0.55 1
Canada 1970-2005 36 -5.977

1995 0.72 0 -5.349

1995 0.72 0
Czech Republic 1990-2005 16 -1.764 1996 0.44 3 -2.627 1996 0.44 3
Denmark 1966-2005 40 -3.615

1989 0.60 3 -3.505 1989 0.60 3

Finland 1970-2005 36 -2.709 1984 0.42 0 -2.268 1997 0.78 0
France 1990-2005 16 -2.562 1996 0.44 1 -2.319 1998 0.56 1
Germany 1970-1990 21 -4.527

1975 0.29 0 -4.148 1981 0.57 0

Germany 1992-2005 14 -2.548 1998 0.50 1 -5.855

1998 0.50 1
Greece 1987-2005 19 -2.068 1999 0.68 0 -2.855 1997 0.58 3
Hungary 1991-2004 14 -2.489 1997 0.50 0 -2.516 1997 0.50 0
Iceland 1970-2005 36 -3.480

1985 0.44 0 -4.755

1989 0.56 3
Ireland 1970-2005 36 -9.650

1978 0.25 0 -9.824

1978 0.25 0
Italy 1982-2005 24 0.307 1991 0.42 0 -3.633 1989 0.33 0
Japan 1970-2004 35 -3.514

1979 0.29 0 -2.234 1994 0.71 0

Korea 1983-2005 23 -2.068 1997 0.65 0 -1.986 1997 0.65 0
Luxembourg 1975-2005 31 -0.926 1982 0.26 0 -2.008 1986 0.39 0
Mexico 1990-2005 16 -2.510 1997 0.50 1 -5.072

1997 0.50 2
Netherlands 1972-2002 31 -2.169 1995 0.77 0 -3.290 1995 0.77 0
New Zealand 1970-2005 36 -0.744 1981 0.33 0 0.976 1981 0.33 1
Norway 1970-2005 36 -4.890

1979 0.28 0 -2.366 1977 0.22 3

Poland 1990-2005 16 -14.740

1997 0.50 0 -0.630 1997 0.50 2

Portugal 1970-2005 36 -3.585

1981 0.33 0 -1.095 1989 0.56 3

Slovak Republic 1997-2005 9 -1.286 2000 0.44 1 -4.063 2001 0.56 0
Spain 1970-2005 36 -1.711 1982 0.36 1 -2.356 1987 0.50 0
Sweden 1970-2005 36 -2.795 1979 0.28 2 -2.746 1976 0.19 0
Switzerland 1985-2005 21 -2.675 1997 0.62 0 -3.992 1997 0.62 0
Turkey 1984-2005 22 2.165 1995 0.50 2 0.495 1998 0.64 2
UK 1970-2005 36 -3.677

1976 0.19 3 -3.313 1992 0.64 0

USA 1970-2005 36 -1.769 1975 0.17 1 -3.123 1993 0.67 1
Note: */**/*** denotes signicance at the 10%/5%/1% level.
30
Table 9: Rejection of the null hypothesis
Country Total HE Public HE Private HE
Australia X - X
Austria X - -
Belgium X X -
Germany X - X
Luxemburg X X -
Netherlands X X -
Poland X - X
Portugal X X X
Sweden X X -
Switzerland X - -
UK X - X
Czech Rep. X - -
Spain X X -
Mexico - X X
Slovak Rep. - X -
Korea - X -
Italy - X -
Iceland - X X
Hungary - X -
Canada - - X
Denmark - - X
Ireland - - X
Japan - - X
Norway - - X
31