We show that the main testable implication of the buffer stock model is that the covariance between the wealth gap (the difference between actual and target wealth) and consumption is (strongly) positive. Although we focus on Carroll’s version of the buffer stock model, the test applies equally well to Deaton’s case. In Carroll, buffer stock behavior emerges from the tension between impatience, prudence, and the chance of zero earnings. Impatient individuals would like to anticipate consumption, but the chance of zero future earnings generates a demand for wealth. In Deaton, the tension is between impatience, prudence, and liquidity constraints, but the insights are similar, and buffer stock behavior.
