Is the health care price inflation in US urban areas stationary? Evidence from panel unit root tests


  • Vasudeva Murthy Department of Economics and Finance, Creighton University, Omaha, Nebraska, USA
  • Albert Okunade Department of Economics, University of Memphis, Memphis, Tennessee, USA


Cross-sectional dependence, Health-care price inflation rate, Multiple structural breaks, Panel unit root tests


Purpose. This study aims to investigate, for the first time in the literature, the stochastic properties of the US aggregate health-care price inflation rate series, using the data on health-care inflation rates for a panel of 17 major US urban areas for the period 1966-2006.

Design/methodology/approach. This goal is undertaken by applying the first- and second-generation panel unit root tests and the panel stationary test developed recently by Carrion-i-Silvestre et al. (2005) that allows for endogenously determined multiple structural breaks and is flexible enough to control for the presence of cross-sectional dependence.

Findings. The empirical findings indicate that after controlling for the presence of cross-sectional dependence, finite sample bias, and asymptotic normality, the US aggregate health-care price inflation rate series can be characterized as a non-stationary process and not as a regime-wise stationary innovation process.

Research limitations/implications. The research findings apply to understanding of health-care sector price escalation in US urban areas. These findings have timely implications for the understanding of the data structure and, therefore, constructs of economic models of urban health-care price inflation rates. The results confirming the presence of a unit root indicating a high degree of inflationary persistence in the health sector suggests need for further studies on health-care inflation rate persistence using the alternative measures of persistence. This study’s conclusions do not apply to non-urban areas.

Practical implications. The mean and variance of US urban health-care inflation rate are not constant. Therefore, insurers and policy rate setters need good understanding of the interplay of the various factors driving the explosive health-care insurance rates over the large US metropolitan landscape. The study findings have implications for health-care insurance premium rate setting, health-care inflation econometric modeling and forecasting.

Social implications. Payers (private and public employers) of health-care insurance rates in US urban areas should evaluate the value of benefits received in relation to the skyrocketing rise of health-care insurance premiums.

Originality/value. This is the first empirical research focusing on the shape of urban health-care inflation
rates in the USA. 



Download data is not yet available.


Arize, A. (2005), “Inflation and structural change in 50 developing countries”, Atlantic Economic Journal, Vol. 33 No. 4, pp. 461-471.

Bai, J. and Ng, S. (2002), “Multiple structural change models: a simulation analysis”, in Corbae, D., Durlaurf, P.S. and Hansen, B. (Eds), Econometric Theory and Practice: frontiers of Analysis and Applied Research, Cambridge University Press, Cambridge, MA.

Bai, J. and Ng, S. (2004), “A panic attack on unit roots and cointegration”, Econometrica, Vol. 72 No. 4, pp. 1127-11177.

Bai, J. and Perron, P. (1998), “Estimating and testing linear models with multiple structural changes”, Econometrica, Vol. 66 No. 1, pp. 47-78.

Bai, J. and Perron, P. (2001), “Estimating and testing linear models with multiple structural changes”, Econometrica, Vol. 66 No. 1, pp. 47-78.

Baltagi, B. (2005), Econometric Analysis of Panel Data, 3rd ed., John Wiley & Sons, Cambridge, MA.

Banerjee, A., Marcellino, M. and Osbat, C. (2005), “Testing for PPP: should we use panel methods?”, Econometrica, Vol. 30 No. 1, pp. 1127-1177.

Basher, S. and Westerlund, J. (2006), “Is there really a unit root in the inflation rate? More evidence from panel data models”, University of Muenchen Working Paper No. 136.

Bodenheimer, T. (2005), “High and rising health care costs: part 2: technological innovation”, Annals of Internal Medicine, Vol. 142 No. 11, pp. 932-937.

Breitung, J. (2000), “The local power of some unit root tests for panel data”, in Baltagi, B. (Ed.), Nonstationary Panels, Panel Cointegration, and Dynamic Panels, Advances in Econometrics, Elsevier Science, Amsterdam, Vol. 15, pp. 161-178.

Breitung, J. and Pesaran, M. (2005), “Unit roots and cointegration in panels”, Discussion Paper Series 1, Economic Studies No. 42, Deutsche Bundsbank, Frankfurt.

Bureau of Labor Statistics – BLS (2007), available at:

Carrion-i-Silvestre, J., Del Barrio, T. and Lopez Bazo, E. (2005), “Breaking the panels: an application to the GDP per capita”, The Econometrics Journal, Vol. 8 No. 2, pp. 159-175.

Chang, Y. (2002), “Nonlinear IV unit root tests in panels with cross-sectional dependency”, Journal of Econometrics, Vol. 110, pp. 261-292.

Chang, Y. (2004), “Bootstrap unit root tests in panel with cross-sectional dependency”, Journal of Econometrics, Vol. 120 No. 2, pp. 263-293.

Charmeza, W., Hristova, D. and Burridge, P. (2005), “Is inflation stationary?”, Applied Economics, Vol. 37, pp. 607-617.

Corvoisier, S. and Mojon, B. (2005), “Breaks in the mean of inflation: how they happen and what to do with them?”, European Central Bank, Working Paper Series, No. 451.

Crowder, W. and Wohar, M. (1999), “Are tax effects important in the long-run Fisher relationship? evidence from the municipal bond market”, Journal of Finance, Vol. 54 No. 1, pp. 307-317.

Culver, S. and Papell, D. (1997), “Is there a unit root in the inflation rate? Evidence from sequential break and panel data models”, Journal of Applied Econometrics, Vol. 12 No. 4, pp. 435-444.

Cutler, D.M., McClellan, M., Newhouse, J.P. and Remler, D. (1998), “Are medical prices declining? Evidence from heart attack treatments”, Quarterly Journal of Economics, Vol. 113 No. 4, pp. 991-1024.

Ericsson, N., Hendry, D. and Mizon, G. (1998), “Exogeneity, cointegration and economic policy analysis”, FRB International Finance Discussion Paper No. 616, pp. 370-387.

Fisher, R.A. (1932), Statistical Methods for Research Workers, 4th ed., Oliver and Boyd, Edinburgh.

Gengenback, C., Palm, F. and Urbain, J. (2005), “Panel unit root tests in the presence of cross- sectional dependencies: comparison and implications for modeling”, Mimeograph, Maastricht University.

Gerdtham, U. and Jonsson, B. (2000), “International comparisons of health expenditure: theory, data, and econometric analysis”, Handbook of Health Economics, Elsevier Science, Amsterdam, Vol. 1, pp. 11-53.

Hadri, K. (2000), “Testing for stationarity in heterogeneous panel data”, Econometrics Journal, Vol. 3 No. 2, pp. 148-161.

Holmes, M. (2002), “Panel data evidence on inflation convergence in the European union”, Applied Economics Letters, Vol. 9 No. 3, pp. 155-158.

Hurlin, C. (2007), “What would Nelson and Plosser find had they used panel unit root tests?”, University of Orleans, France, Working Paper.

Im, K., Lee, J. and Tieslau, M. (2005), “Panel LM unit root test with level shifts”, Oxford Bulletin of Economics and Statistics, Vol. 67 No. 3, pp. 393-419.

Im, K., Pesaran, M. and Shin, Y. (2003), “Testing for unit roots in heterogeneous panels”, Journal of Econometrics, Vol. 115 No. 1, pp. 53-74.

Johansen, S. (1992), “Testing weak exogeneity and the order of cointegration in UK money demand data”, Journal of Policy Modeling, Vol. 14 No. 3, pp. 313-334.

Joszt, L. (2014), “Costliest cities for primary care visits”, Physician’s Money Digest, available at: (accessed 16 June).

Joszt, L. (2015), “Identifying high-price, low-price healthcare markets”, available at: (accessed 15 October).

Kwiatkowski, D., Phillips, P., Schmidt, P. and Shin, Y. (1992), “Testing the null hypothesis of stationary against the alternative of a unit root: how sure are we that economic time series have a unit root?”, Journal of Econometrics, Vol. 54 Nos 1/3, pp. 159-178.

Lee, C. and Chang, C. (2007), “Mean reversion of inflation rates in 19 OECD countries: evidence from panel LM unit root tests with structural breaks”, Economics Bulletin, Vol. 3, pp. 1-15.

Lee, H. and Wu, S. (2001), “Mean reversion of inflation rates: evidence from 13 OECD countries”, Journal of Macroeconomics, Vol. 23 No. 3, pp. 477-487.

Lee, J. and Strazicich, M. (2003), “Minimum Lagrange multiplier unit root tests with two structural breaks”, Review of Economics and Statistics, Vol. 85 No. 4, pp. 1082-1089.

Levin, A. and Piger, J. (2004), “Is inflation persistence intrinsic in industrial economics?”, European Central Bank, Working paper Series, No. 334.

Levin, A., Lin, C. and Chu, C. (2002), “Unit root tests in panel data: asymptotic and finite-sample properties”, Journal of Econometrics, Vol. 108 No. 1, pp. 1-24.

Liu, J., Wu, S. and Zidek, J. (1997), “On segmented multivariate regressions”, Statistica Sinica, Vol. 7, pp. 497-525.

Lumsdaine, R. and Papell, D. (1997), “Multiple trend breaks and the unit root hypothesis”, Review of Economics and Statistics, Vol. 79 No. 2, pp. 212-218.

Maddala, G. and Wu, S. (1999), “A comparative study of unit root tests with panel data and a new simple test”, Oxford Bulletin of Economics and Statistics (Special Issue), Vol. 61 No. 1, pp. 631-652.

Moon, H. and Perron, B. (2004), “Testing for a unit root in panels with dynamic factors”, Journal of Econometrics, Vol. 122 No. 1, pp. 81-126.

Murthy, N. (2007), “Panel cointegration analysis: an empirical example”, in Rao, B. (Ed.), Cointegration for the Applied Economist, 2nd ed., Palgrave-MacMillan, New York, NY.

Murthy, V. and Okunade, A. (2000), “Managed care, deficit financing and aggregate health care expenditure in the United States: a cointegration analysis”, Health Care Management Science, Vol. 3 No. 4, pp. 279-285.

Murthy, V.N.R. and Okunade, A. (2016), “Determinants of US health expenditure: evidence from autoregressive distributed lag (ARDL) approach to cointegration”, Economic Modelling, Vol. 59, pp. 67-73.

Newhouse, J. (1977), “Medical care expenditure: a cross national survey”, Journal of Human Resources, Vol. 12 No. 1, pp. 112-125.

Nguyen, V.B. (2015), “Effects of fiscal deficit and money M2 supply on inflation: evidence from selected economies of Asia”, Journal of Economics, Finance and Administrative Science, Vol. 20 No. 38, pp. 49-53.

O’Connel, P. (1998), “The overvaluation of purchasing power parity”, Journal of International Economics, Vol. 44 No. 1, pp. 1-19.

O’Reilly, G. and Whelan, K. (2004), “Has Euro-area inflation persistence changed over time?”, European Central Bank, Working paper Series, No. 335, pp. 1-39.

Okunade, A. and Murthy, V. (2002), “Technology as a major driver of health care costs: a cointegration analysis of the newhouse conjecture”, Journal of Health Economics, Vol. 21 No. 1, pp. 147-159.

Perron, P. (1989), “The great crash, the oil shock and the unit root hypothesis”, Econometrica, Vol. 57, pp. 1361-1401.

Perron, P. and Ng, S. (1996), “Useful modifications to some unit root tests with dependent errors and their local asymptotic properties”, Review of Economic Studies, Vol. 63 No. 3, pp. 435-463.

Pesaran, M. (2004), “General diagnostic tests for cross section dependence in panels”, Cambridge Working Papers in Economics, No. 435, University of Cambridge and CESifo Working Paper Series No. 1229.

Pesaran, M. (2007), “A simple panel unit root test in the presence of cross-section dependence”, Journal of Applied Econometrics, Vol. 22 No. 2, pp. 265-312.

Phillips, P. and Perron, P. (1988), “Testing for a unit root in time series regression”, Biometrika, Vol. 75 No. 2, pp. 335-346.

Phillips, P. and Sul, D. (2003), “Dynamic panel estimation and homogeneity testing under cross section dependence”, Econometrics Journal, Vol. 6 No. 1, pp. 217-259.

Rapach, D. (2002), “The long-run relationship between inflation and real stock prices”, Journal of Macroeconomics, Vol. 24 No. 4, pp. 331-351.

Rodrizuez, G. (2004), “An empirical note about additive outliers and nonstationarity in Latin American inflation series”, Empirical Economics, Vol. 29 No. 2, pp. 361-372.

Romero-Ávila, D. and Usabiaga, C. (2009a), “The hypothesis of a unit root in OECD inflation revisited”, Journal of Economics and Business, Vol. 61 No. 2, pp. 153-161.

Romero-Ávila, D. and Usabiaga, C. (2009b), “Unit root tests, persistence, and the unemployment rate of the US states”, Southern Economic Journal, Vol. 73 No. 3, pp. 698-716.

Rose, A. (1988), “Is the real interest rate stable?”, Journal of Finance, Vol. 43 No. 5, pp. 1095-1112.

Strauss, J. and Yigit, T. (2003), “Shortfalls of panel unit root testing”, Economics Letters, Vol. 81 No. 3, pp. 309-313.

Thanh, S.D. (2015), “Threshold effects of inflation on growth in the ASEAN-5 countries: a panel smooth transition regression approach”, Journal of Economics, Finance and Administrative Science, Vol. 20 No. 38, pp. 41-48.

US Bureau of Labor Statistics (2014), “Overview of BLS statistics on inflation and prices”, available at:

Zivot, E. and Andrews, D. (1992), “Further evidence on the great crash, the oil price shock, and the unit root hypothesis”, Journal of Business and Economic Statistics, Vol. 10 No. 3, pp. 251-270.




How to Cite

Murthy, V. ., & Okunade, A. . (2018). Is the health care price inflation in US urban areas stationary? Evidence from panel unit root tests. Journal of Economics, Finance and Administrative Science, 23(44), 77–94. Retrieved from