Liquidity Constraints, Loss Aversion, and Myopia: Evidence from Central and Eastern European Countries

Abstract

This paper adopts the asymmetric error correction technique to investigate the dynamics of household consumption in Central and Eastern European (CEE) countries. The asymmetric co-integration testing shows that households in all CEE countries but Bulgaria respond asymmetrically to negative and positive shocks. Further, the estimates of the asymmetric error correction equations show that despite underdeveloped banking sectors, households in all CEE countries asymmetrically responding to deviations but Slovakia exhibit loss aversion. As an explanation for this finding, we suggest that to smooth consumption, households in these countries deplete their savings.