In the light of repeated rejections of the Hall (1978) version of the life cycle-permanent income hypothesis and other empirical puzzles, the habit formation hypothesis has increased in popularity since the 1980s. However, existing formulations of habit persistence do not always perform well...

This paper proposes an asymmetric model within which consumer credit facilitates both consumption smoothing and rational habit modification. 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...