The role of permanent and transitory shocks in explaining international health expenditures

While there is a growing literature that examines the issue of cointegration (co‐movement over the long run) among health expenditures, there are no studies that examine the issue of common cycles (co‐movement over the short run) among health expenditures. We undertake a multivariate variance decomposition analysis of per capita health expenditures of the USA, the UK, Japan, Canada, and Switzerland based on a common‐trend–common‐cycle restriction framework, to examine the relative importance of permanent and transitory innovations in explaining variations in per capita health expenditures in each of the five countries. Our main finding is that transitory shocks are more important in explaining per capita health expenditures in the UK, Japan, and Switzerland, while permanent shocks dominate variations in per capita health expenditures in the USA and Canada over short horizons. Copyright © 2007 John Wiley & Sons, Ltd.