Research Paper No. 681

RATIONAL HABIT MODIFICATION IN CONSUMPTION: THE ROLE OF DURABLES AND CREDIT

by

George Messinis

March 1999

Department of Economics. University of Melbourne. Parkville Victoria 3052 Australia

ABSTRACT

Since Brown (1952), standard habit formation models of consumption have exclusively focused on non-durables and services expenditure, and have assumed that the depreciation of the habit stock is a linear, univariate process. This paper builds on Ermini (1997) to dispense with these two assumptions and arrive at two alternative models of habit modification. The first rests on a complementarity between durables and non-durables, the second highlights consumer debt as a source of memory loss. In both cases the representative consumer is motivated to moderate habitual behaviour. The models nest several alternative hypotheses and can potentially explain some of the empirical puzzles in the consumption literature.
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