View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Digital Commons@Wayne State University Wayne State University DigitalCommons@WayneState Wayne State University Dissertations 1-1-2013 Financial Development And Health Capital Accumulation Gunakar Bhatta Wayne State University, Follow this and additional works at:http://digitalcommons.wayne.edu/oa_dissertations Recommended Citation Bhatta, Gunakar, "Financial Development And Health Capital Accumulation" (2013).Wayne State University Dissertations.Paper 638. This Open Access Dissertation is brought to you for free and open access by DigitalCommons@WayneState. It has been accepted for inclusion in Wayne State University Dissertations by an authorized administrator of DigitalCommons@WayneState. FINANCIAL DEVELOPMENT AND HEALTH CAPITAL ACCUMULATION by GUNAKAR BHATTA DISSERTATION Submitted to the Graduate School of Wayne State University, Detroit, Michigan in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY 2013 MAJOR: ECONOMICS Approved by: _________________________________________ Advisor Date _________________________________________ _________________________________________ _________________________________________ DEDICATION To millions of brothers and sisters suffering from disease, hunger, poverty and financial deprivation around the world ii ACKNOWLEDGEMENTS I am profoundly grateful to Professor Allen C. Goodman for his kind consent to chair the dissertation committee. Professor Goodman’s continuous guidance, motivation and professional advice during the graduate study have greatly influenced my success in the program. I am really impressed with his kind and cooperative nature and highly appreciate of his immediate responses to my mails. It would have been almost impossible for me to complete this work in a timely manner if Professor Goodman had not given his consent to become my advisor within few hours of my mail request. Professor Goodman deserves special thanks for being a great guru who teaches, advises, motivates and cares his disciples, and admires their new ideas. I would like to extend my sincere thanks to other members of the dissertation committee, Professor Li Way Lee, Professor Janet Hankin, and Professor Tatsuma Wada for their thoughtful advices and kind cooperation. I am also thankful to other Professors in the Department who taught me during the graduate program and staff at the Economics Department, Delores Tennille and Cheri Miller for their continuous support. The graduate workshops organized by the Department remained helpful in refining the materials. Credit goes to Professor Robert Rossana. Thanks also to the conference participants at the Southern Economic Association Conference in New Orleans in November 2012 for constructive comments. I have a deep appreciation to Nepal Rastra Bank for providing me the study leave, without which my journey to graduate school would not have been possible. I am also thankful to all the Nepali friends who continuously gave me and my family a homely environment during our stay in Michigan. I am indebted to my parents, Liladhar and Bishnadevi for their sacrifices, devotion and farsightedness. I salute you dad and mom for your commitment, courage and patience and for teaching me to aim higher, work hard and remain patient. My brothers and sisters always remain iii wonderful and supportive in my educational pursuits. I am also thankful to other members of our family, friends and relatives for their good wishes and blessings. Finally, let me thank and congratulate my wife Gita for her unconditional love, support and sacrifice. Our two wonderful daughters Pragyee and Shatakshi are our true source of happiness and inspiration. It would have been almost impossible for me to come to this stage without the patience and support of my wife Gita and daughter Pragyee during the graduate study. I respect you both for your perseverance and wisdom and always reminding me my PhD. I will never forget you Pragyee telling me: Baba, work hard! In fact, nothing was so wonderful for me than a seven year old encouraging me to study for my exams. At the end, I am alone responsible for any errors and omissions in this dissertation work. iv TABLE OF CONTENTS Dedication ___________________________________________________________ ii Acknowledgements ______________________________________________________ iii List of Tables ___________________________________________________________ viii List of Figures ___________________________________________________________ x Chapter 1 Introduction ___________________________________________________ 1 1.1 Overview ______________________________________________________ 1 1.2 Background ____________________________________________________ 2 1.3 Operating Channels ______________________________________________ 3 1.4 Motivation _____________________________________________________ 5 1.5 Research Avenue _______________________________________________ 8 1.6 Objectives _____________________________________________________ 9 1.7 Research Hypothesis _____________________________________________ 10 Chapter 2 Literature Review ______________________________________________ 12 Chapter 3 Theoretical Model ______________________________________________ 18 3.1 Model with Medical Care Market and Loan Market _____________________ 18 3.2 Comparative Statistics ____________________________________________ 20 3.3 Introducing Household Utility Maximization___________________________ 22 Chapter 4 Financial Development and Health Capital Accumulation _____________ 25 4.1 Introduction_____________________________________________________ 25 4.2 Purpose ________________________________________________________ 26 4.3 Methodology ___________________________________________________ 28 4.4 Variables ______________________________________________________ 28 v 4.5 Variable Descriptions____________________________________________ 29 4.6 Data Sources___________________________________________________ 31 4.7 Econometric Analysis and Findings__________________________________ 32 4.7.1 Panel Estimation_________________________________________ 32 4.7.2 Panel Unit Root Test ______________________________________ 34 4.7.3 Life Expectancy and Financial Development___________________ 35 4.7.4 Infant Mortality and Financial Development____________________ 42 4.7.5 Low Birth Weight and Financial Development__________________ 46 4.7.6 Discussions_____________________________________________ 48 4.8 Transmission Mechanism__________________________________________ 49 4.9 Conclusions_____________________________________________________ 54 Chapter 5 Financial Development and Health in South Asia_____________________ 56 5.1 Introduction_____________________________________________________ 56 5.2 Objectives______________________________________________________ 62 5.3 Methodology____________________________________________________ 62 5.4 Variables ______________________________________________________ 62 5.5 Variable Descriptions _____________________________________________63 5.6 Data Sources ___________________________________________________ 64 5.7 Econometric Analysis and Findings__________________________________ 65 5.7.1 Panel Estimation _________________________________________ 65 5.7.2 Financial Development and Life Expectancy __________________ 66 5.7.3 Financial Development and Infant Mortality____________________ 68 5.7.4 Transmission Mechanism__________________________________ 70 vi 5.7.5 Discussions_____________________________________________ 73 5.8 Conclusions_____________________________________________________ 74 Chapter 6 Effect of Financial Shocks on Health Indicators______________________ 76 6.1 Introduction_____________________________________________________ 76 6.2 Impulse Response Functions and Variance Decomposition Analysis________ 77 6.2.1 Impulse Response Functions________________________________ 78 6.2.2 Variance Decomposition Analysis____________________________ 82 6.3 Behavior of Health Indicators in the Post Financial Crisis Period___________ 84 Chapter 7 Summary and Conclusions _______________________________________ 89 Appendix 1: List of the Variables used in the OECD Countries’ Analysis.......................... 92 Appendix 2: Averages of the Variables for the OECD Countries………………………… 94 Appendix 3: Summary Statistics of the Variables for the OECD Countries……………… 95 Appendix 4: Correlation Matrix of the Variables for the OECD Countries………………. 96 Appendix 5: Summary Statistics of Variables for the South Asian Analysis……… ……... 97 Appendix 6: Correlation Matrix of Variables used in South Asian Analysis……………… 98 Appendix 7: Sample Averages of the Variables for South Asia…………………………… 99 References ________________________________________________________ _____ 100 Abstract __________________________________________________________ _____ 107 Autobiographical Statement ______________________________________________ 109 vii LIST OF TABLES Chapter 4 Table 1 Health Outcomes in G7 Countries and OECD Average………………………….. 26 Table 2 Some Financial Indicators …………………………………………………….. 27 Table 3 Panel Unit Root Test ……………………………………………………………... 35 Table 4 Wooldridge’s Test for Hetroskedasticity…………………………………………. 37 Table 5 Life Expectancy and Financial Development: Fixed Effect Estimation………….. 38 Table 6 Life Expectancy and Financial Development: IV Estimation…………………….. 40 Table 7 Wooldridge’s Test for Hetroskedasticity …………………………………………. 42 Table 8 Infant Mortality and Financial Development: Fixed Effect Estimation………….. 44 Table 9 Infant Mortality and Financial Development: IV Estimation……………………. 45 Table 10 Low Birth Weight and Financial Development…………………………………. 47 Table 11 OECD Countries: Summary of Major Findings ………………………………… 48 Table 12 Effect of Income on Health Outcomes………………………………………….. 50 Table 13 Effect of Education on Health Outcomes……………………………………….. 51 Table 14 Financial Development, Income and Education…………………. ……………... 53 Chapter 5 Table 1 Composition of Gross Domestic Product………………………………………… 58 Table 2 Achievements in Health Outcomes in South Asia………………………………… 58 Table 3 South Asia: Some Challenges…………………………………………………...... 60 Table 4 Wooldridge’s Test for Hetroskedasticity………………………………………….. 66 Table 5 Financial Development and Life Expectancy……………………………………... 67 Table 6 Financial Development and Infant Mortality……………………………………... 69 viii Table 7 Effect of Income on Health……………………………………………………….. 70 Table 8 Effect of Education on Health…………………………………………………….. 71 Table 9 Effect of Credit on Income and Education………………………………………... 72 Table 10 South Asia: Summary of Major Findings……………………………………….. 73 Chapter 6 Table 1 Variance Decomposition: Credit…………………………………………………. 82 Table 2 Variance Decomposition: Market Capitalization ………………………………… 83 Table 3 Variance Decomposition: Liquid Liabilities ……………………………………... 84 Table 4 Regression of Health Outcomes on Financial Crisis Dummies: Credit……………86 Table 5 Regression of Health Outcomes on Financial Crisis Dummies: Mktcap…………. 88 ix