Rational Habit Modification: the Role of Credit

Ólan Henry, George Messinis and Nilss Olekalns (nilss@unimelb.edu.au)

No 729, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: This paper proposes an asymmetric model within which consumer credit facilitates both consumption smoothing and rational habit modification. The model provides a better description of aggregate time series consumption data than competeting models. In particular, the model can account for the various aggregate consumption anomalies that have led to repeated rejections of Hall's (1978) random walk model of consumption. The model is applied to US data using a GMM approach. The evidence suggests that new credit can predict short-run changes in consumption and has assisted consumers to become more forward-looking since 1975.

Keywords: CONSUMPTION; CREDIT; ESTIMATOR (search for similar items in EconPapers)
JEL-codes: C13 E2 (search for similar items in EconPapers)
Pages: 28 pages
Date: 1999
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