Keywords: Automobiles, GDP volatility
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, could in fact be 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.
Full paper (827 KB PDF)
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Last update: April 29, 2005