Tracking the Source of the Decline in GDP Volatility: An Analysis of the Automobile Industry

Valerie Ramey · Daniel J. Vine

57 citations0/0 files storedNational Bureau of Economic Research

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Monetary Policy and Economic Impact Economic Theory and Policy Market Dynamics and Volatility

Abstract

Recent papers by Kim and Nelson (1999) and McConnell and Perez-Quiros (2000) uncover a dramatic decline in the volatility of U.S. GDP growth beginning in 1984.Determining whether the source is good luck, good policy or better inventory management has since developed into an active area of research.This paper seeks to shed light on the source of the decline in volatility by studying the behavior of the U.S. automobile industry, where the changes in volatility have mirrored those of the aggregate data.We find that changes in the relative volatility of sales and output, which have been interpreted by some as evidence of improved inventory management, are in fact the result of changes in the process driving automobile sales.We first show that the autocorrelation of sales dropped during the 1980s, and that the behavior of interest rates may be the force behind the change in sales persistence.A simulation of the assembly plants' cost function illustrates that the persistence of sales is a key determinant of output volatility.A comparison of the ways in which assembly plants scheduled production in the 1990s relative to the 1970s supports the intuition of the simulation.

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2000Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory*n.d.Output Fluctuations in the United States: What Has Changed since the Early 1980's?1986Finite state markov-chain approximations to univariate and vector autoregressions 2002Has the Business Cycle Changed and Why?1999Has the U.S. Economy Become More Stable? A Bayesian Approach Based on a Markov-Switching Model of the Business Cycle 1998Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory 2001The Long and Large Decline in U.S. Output Volatility 2006Has Monetary Policy Become More Effective?

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2009Volatility Accounting: A Production Perspective on Increased Economic Stability 2008A state-level analysis of the Great Moderation 2007EXPLAINING INVENTORIES: A BUSINESS CYCLE ASSESSMENT OF THE STOCKOUT AVOIDANCE AND (S,s) MOTIVES 2005Prices, Production and Inventories over the Automotive Model Year 2005The Roles of Comovement and Inventory Investment in the Reduction of Output Volatility

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