Declining Volatility in the U.S. Automobile Industry

Valerie A. Ramey, Daniel J. Vine

NBER Working Paper No. 11596
Issued in September 2005
NBER Program(s):Economic Fluctuations and Growth

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—a 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.

download in pdf format
   (343 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11596

Published: Valerie A. Ramey & Daniel J. Vine, 2006. "Declining Volatility in the U.S. Automobile Industry," American Economic Review, American Economic Association, vol. 96(5), pages 1876-1889, December. citation courtesy of

Users who downloaded this paper also downloaded* these:
Ramey and Vine w10384 Tracking the Source of the Decline in GDP Volatility: An Analysis of the Automobile Industry
Ramey and Vine w16067 Oil, Automobiles, and the U.S. Economy: How Much have Things Really Changed?
Hashmi and Van Biesebroeck w15959 Market Structure and Innovation: A Dynamic Analysis of the Global Automobile Industry
Raff and Trajtenberg Quality-Adjusted Prices for the American Automobile Industry: 1906-1940
Novak and Stern w13235 How Does Outsourcing Affect Performance Dynamics? Evidence from the Automobile Industry
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us