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The Decline in U.S. Output Volatility: Structural Changes and Inventory Investment

  • Herrera, Ana Maria
  • Pesavento, Elena

Various hypothesis have been offered as explanations for the decline in U.S. output volatility during the mid-1980s: "better policy," "good luck," technological change, and the presence of non-convexities in the firms' cost function. We find evidence of multiple breaks in manufacturing for various inventories and sales series. Mainly an increase in the variance in the 1970s was followed by a decrease in the 1980s and 1990s. Reductions in the volatility of inventories was concentrated in materials and work-in-process, with minor falls in finished goods. Our results suggest that "better inventory holding techniques" might not be enough to account for the reduction in the volatility of output. In fact, a mechanism able to generate shifts in the variance of sales, such as "good luck" or "better monetary policy", must have contributed to the rise in output volatility in the 1970s and its subsequent decline since the mid-1980s.

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Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 23 (2005)
Issue (Month): (October)
Pages: 462-472

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Handle: RePEc:bes:jnlbes:v:23:y:2005:p:462-472
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