Testing for structural breaks in panel varying coefficient models: with an application to OECD health expenditure

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.