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

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  • Ramiz Rahmanov

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.

Suggested Citation

  • Ramiz Rahmanov, 2014. "Liquidity Constraints, Loss Aversion, and Myopia: Evidence from Central and Eastern European Countries," William Davidson Institute Working Papers Series wp1082, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:2014-1082
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    More about this item

    Keywords

    loss aversion; liquidity constraints; consumption; asymmetric error correction model; Central and Eastern Europe.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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