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

  • Valerie A. Ramey
  • Daniel J. Vine

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10384.

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Date of creation: Mar 2004
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Handle: RePEc:nbr:nberwo:10384
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  1. Hall, George J., 2000. "Non-convex costs and capital utilization: A study of production scheduling at automobile assembly plants," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 681-716, June.
  2. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  3. JONATHAN McCARTHY & EGON ZAKRAJSEK, 2007. "Inventory Dynamics and Business Cycles: What Has Changed?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 591-613, 03.
  4. John Haltiwanger & Russell Cooper, 1992. "The Aggregate Implications Of Machine Replacement: Theory And Evidence," Working Papers 92-12, Center for Economic Studies, U.S. Census Bureau.
  5. Boivin, Jean & Giannoni, Marc, 2006. "Has Monetary Policy Become More Effective?," CEPR Discussion Papers 5463, C.E.P.R. Discussion Papers.
  6. Owen Irvine & Scott Schuh, 2002. "Inventory investment and output volatility," Working Papers 02-6, Federal Reserve Bank of Boston.
  7. Blanchard, Olivier J, 1983. "The Production and Inventory Behavior of the American Automobile Industry," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 365-400, June.
  8. Chang-Jin Kim & Charles Nelson & Jeremy Piger, 2001. "The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations," International Finance Discussion Papers 707, Board of Governors of the Federal Reserve System (U.S.).
  9. Valerie A. Ramey & Daniel J. Vine, 2004. "Why Do Real and Nominal Inventory-Sales Ratios Have Different Trends," NBER Working Papers 10703, National Bureau of Economic Research, Inc.
  10. Valerie A. Ramey & Kenneth D. West, 1997. "Inventories," NBER Working Papers 6315, National Bureau of Economic Research, Inc.
    • Ramey, Valerie A. & West, Kenneth D., 1999. "Inventories," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 13, pages 863-923 Elsevier.
  11. James A. Kahn & Margaret M. McConnell & Gabriel Perez-Quiros, 2002. "On the causes of the increased stability of the U.S. economy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 183-202.
  12. Chang-Jin Kim & Charles R. Nelson, 1999. "Has The U.S. Economy Become More Stable? A Bayesian Approach Based On A Markov-Switching Model Of The Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 608-616, November.
  13. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  14. Ramey, Valerie A, 1991. "Nonconvex Costs and the Behavior of Inventories," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 306-34, April.
  15. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  16. Bresnahan, Timothy F & Ramey, Valerie A, 1993. "Segment Shifts and Capacity Utilization in the U.S. Automobile Industry," American Economic Review, American Economic Association, vol. 83(2), pages 213-18, May.
  17. James H. Stock & Mark W. Watson, 2003. "Has the business cycle changed?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 9-56.
  18. Kahn, James A, 1992. "Why Is Production More Volatile Than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 481-510, May.
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