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

51 Pages Posted: 1 Apr 2004 Last revised: 17 Nov 2022

See all articles by Valerie A. Ramey

Valerie A. Ramey

University of California at San Diego; National Bureau of Economic Research (NBER)

Daniel J. Vine

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: March 2004

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.

Suggested Citation

Ramey, Valerie A. and Vine, Daniel J., Tracking the Source of the Decline in GDP Volatility: An Analysis of the Automobile Industry (March 2004). NBER Working Paper No. w10384, Available at SSRN: https://ssrn.com/abstract=522264

Valerie A. Ramey (Contact Author)

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Daniel J. Vine

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