We propose a panel data model for nonstationary variables with interactive fixed effects and coefficients that may vary over time and use it to examine time variation in the income elasticity of health expenditures in the OECD and the Eurozone. Our empirical analysis shows that the income elasticity of healthcare expenditure slightly increased in the OECD and the Eurozone during 1995–2004 but remained below one. This finding suggests that healthcare is not a luxury good in these countries.
- health expenditure
- income elasticity
- nonlinear cointegration panel data
- nonparametric kernel smoothing