Sourcing the decline in United States GDP volatility: Evidence from the automobile industry

Recent papers by Kim and Nelson (1999) and McConnell and Perez-Quiros (2000) have uncovered a dramatic decline in the volatility of the U.S. economy beginning in 1984. The variance of real quarterly GDP growth since 1984 has been 50 percent lower than it was in the post-war period prior to 1984. This discovery raises an important question: has output volatility declined in a meaningful and permanent way, or have we simply enjoyed a reprieve from the turbulence of the 1960s and 1970s? Possible answers to this question depend on which of the three leading explanations for the decline in volatility is most accurate: (1) Good Luck, (2) Good Policy, or (3) Structural Change.;This thesis evaluates these potential explanations within an industry that has made a particularly large contribution to the decline in U.S. GDP volatility---the automobile industry. Using a new plant-level dataset, I evaluate changes in the production and inventory behavior of U.S. automobile manufacturers between the 1970s and the 1990s. I present evidence that the reduction in output volatility is the consequence of changes in the nature of sales shocks, and lend support to the "Good Policy" explanation. I attribute the disproportionate reduction in volatility of output relative to sales to the presence of non-convexities in the assembly plant's cost function and the relatively high inventory-to-sales ratio held by dealers.;The thesis consists of three chapters. Chapter I examines the transmission of volatility between sales and production in an inventory model that allows variation in the plant workweek. Chapter II documents changes that have occurred in domestic automobile sales between the 1970s and the 1990s and connects these changes to the decline in output volatility. Chapter III demonstrates that important features (nonconvexities) in the plant-level weekly cost function influence output volatility at lower frequencies and higher levels of aggregation. This is true because plants synchronize their use of certain production margins.