TODA YAMAMOTO APPROACH: APPLIED EVIDENCE ON CAUSAL RELATIONSHIP

Abstract

Education and health expenditure are acknowledged as productive government expenses respectively considering human capital as a factor of growth. Also along with income, education and health are core welfare measures covered in Human Development index. The focus of the analysis is to provide evidence of causality between indicators of human development and economic growth. According to endogenous economic growth health has impact on economic growth. Education investment spillovers are both in micro level resulting to increased return for individuals and in macro level resulting in economic growth. The recent pandemics raised question on public health, health care accessibility and healthcare investment and revealed and acknowledge the importance of health and healthcare investments not limited only for economic impact but for numerous impact for human capital and their well being. Education expenditures and health expenditures have increased in line with GDP growth from the beginning of North Macedonia as an independent country till recent year and comparing both series results that health expenditures are lower than education expenditure. For more the percentage of Gross Domestic Product that these expenses represent has decreasing trend. The evidence provided is based on sample period that covers quarterly data for the period 2001 -2018 extracted data from database: World Development Indicators for North Macedonia. We employ Toda and Yamamoto (1995) in order to investigate for Granger causality. First we check if the series are integrated and whether integration order is the same following Augumented Dickey-Fuller (1979) and Philip –Perron techniques. it is expected that series are not stationary in levels and estimation with stochastic trend results in spurious results therefore before providing results and policy implication we should correct until we attain stationarity. The series since employed in analysis are non stationary in levels which as expected is the case with time series variables and they are integrated of order I(1) after we used differencing. The order of lag-length was determined by Schwarz Information Criterion (SBIC), Hannan-Quinn information criterion (HQIC) and Akaike Information Criteria(AIC) and results for our model the appropriate lag is two lags.Accordingly since we get same integration order we follow on cointegration test using Johansen methodology and continue with causality tests. Finally we check the presence of cointegration on VAR model . The existence and direction of causality it is estimated. The results suggest that there is unidirectional Granger causality from health expenditure to economic growth.