This paper provides empirical evidence of the existence of a long-run causal relationship between GDP and health care expenditures, for a group of Latin American and the Caribbean countries and for OECD countries for the period 1995-2014. We estimated the income elasticity of health expenditure to be equal to unity for both groups of countries, that is, health care in Latin American and OECD countries is a necessity rather than a luxury. We did not find evidence of a causal effect in the opposite direction, i.e. from changes in health expenditure to GDP. We present conclusive evidence of the cross-country dependence of the analyzed series, and consequently we used panel unit root tests, panel cointegration tests, and long-run estimates that are robust to such dependence. Specifically, we use the CIPS panel unit root test and the panel Common Correlated Effects estimator. We also show that the results obtained by mistakenly using methods that assume cross-section independence are unstable.
Keywords: Cross-section dependence; Income elasticity of health care expenditures; Latin American and the Caribbean and OECD countries; Panel cointegration.