Does the Consumption of Different Age Groups Move Together?

In recent years Robert Barro's (1974) ingenious model of inter- generational altruism has taken its place among the major theories of consumption and saving. Despite its policy importance, there have been few direct tests of the Barro model. This paper presents a new direct test that is based on a property of the Barro model that, to our knowledge, has not previously been exploited. This property is that the Euler errors (i.e., disturbances in the Euler equations) of altruistically linked members of Barro extended families (clans) are identical. Under time-separable, homothetic utility, this equality of Euler errors means that, controlling for clan preferences about the age distribution of consumption, the percentage changes over time in consumption of all Barro clan members are equal. With some weak additional assumptions, this proposition implies that the average percentage change in household consumption within an age cohort should be the same for all age cohorts. Testing the Barro model by comparing average percentage changes in consumption across age cohorts is particularly advantageous because it is nonparametric; in determining whether the average consumptions of different a