Healthcare Expenditure, Economic Growth, and Inflation in the G7 Countries: A Panel Cointegration Approach

The main aim of this research article is to explain the relationship between the healthcare expenditure, economic growth and inflation in a panel data of the G7 countries for the period 1995 to 2013 by using panel co-integration analysis. To explore the effect of inflation on healthcare expenditure, this article constructs two individual models using the consumer price index (CPI) inflation in the first, and the personal consumption expenditure price index (PCE) in the second. The CPI inflation has been used to calculate the change in the out-of-pocket expenditure of all urban households, while, the PCE inflation was used to measure spending on behalf of households. The results show that the CPI inflation has the most effect on healthcare expenditure rather than the PCE inflation. Also, healthcare expenditure is a necessary good as the short-run income elasticity is less than one for both two models. Using vector error correction model (VECM), the econometric results showed that there is a strong short-run Granger causality from economic growth and price index to healthcare expenditure in both models. Moreover, the impulse response function (IRF) analysis showed that there is a strong positive bidirectional long-run Granger causality between healthcare expenditure and economic growth, and a strong negative bidirectional long-run Granger causality between healthcare expenditure and inflation in both models.