Tracking the Source of the Decline in GDP Volatility: An Analysis of the Automobile Industry / Valerie A. Ramey, Daniel J. Vine.

Format:

Book

Author/Creator:

Ramey, Valerie A.

Contributor:

National Bureau of Economic Research.

Vine, Daniel J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w10384.

NBER working paper series no. w10384

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Tracking the Source of the Decline in GDP Volatility

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2004.

Summary:

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.

Notes:

Print version record

March 2004.