Declining Volatility in the U.S. Automobile Industry

37 Pages Posted: 26 Oct 2005 Last revised: 9 Sep 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

Date Written: September 2005

Abstract

This paper documents the dramatic changes in volatility that occurred in the U.S. auto industry in the early 1980s. Namely, output volatility declined significantly, the covariance of inventory investment and sales became much more negative, and adjustments to output, which in earlier decades stemmed primarily from plants hiring and laying off workers, were more often accomplished with changes in average hours per worker after the mid 1980s. Building on the work of Blanchard (1983), we show how all of these changes could have stemmed from one underlying factor%u2014a decline in the persistence of motor vehicle sales. We use both industry-level data as well as micro data on production schedules from 103 assembly plants in the United States and Canada to document the developments in the early 1980s. We then use the original Holt, Modigliani, Muth and Simon (1960) linear quadratic inventory model to show how a decline in the persistence of sales leads to all of the changes noted above, including the propensity to use intensive margins of adjustment over extensive labor margins, even in the absence of technological change.

Suggested Citation

Ramey, Valerie A. and Vine, Daniel J., Declining Volatility in the U.S. Automobile Industry (September 2005). NBER Working Paper No. w11596, Available at SSRN: https://ssrn.com/abstract=800451

Valerie A. Ramey (Contact Author)

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Daniel J. Vine

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