Sales Persistence and the Reductions in GDP Volatility

A number of explanations for the observed decline in GDP volatility since the mid‐1980s have been offered. Valerie Ramey and Daniel Vine (2003a, 2003b) in a couple of recent papers offer the hypothesis that a decline in the persistence of sales is an explanation for the decline in GDP volatility. Their models show that a decrease in sales persistence leads to a decline in the variance of production relative to the variance of sales. They provide econometric evidence that the persistence of unit automobile sales has declined at both the aggregate and model level. This paper explores reasons why sales persistence may have declined and then tests the Ramey‐Vine hypothesis with monthly chain‐weighted sales data from 2‐ and 3‐digit manufacturing and trade industries. The estimates confirm the Ramey‐Vine findings for motor vehicle retailers, wholesalers, and manufacturers. For a number of industries outside of motor vehicles, especially those in wholesaling and nondurable manufacturing, considerable evidence is found of declines in sales persistence. These declines seem to be consistent with changes in supply and distribution chains that have occurred as the result of the introduction of new information, inventory, and production control systems. However, in equations estimated for aggregate manufacturing, wholesaling, and retail sector sales, declines in sales persistence are not found. JEL Classifications: E32, E22, E23 F. Owen Irvine is Associate Professor in the Department of Economics at Michigan State University and a Visiting Scholar at the Federal Reserve Bank of Boston. His email address is [email protected]. This paper, which may be revised, is available on the web site of the Federal Reserve Bank of Boston at http://www.bos.frb.org/economic/wp/index.htm. The views expressed in this paper are solely those of the author and do not necessarily reflect official positions of the Federal Reserve Bank of Boston or the Federal Reserve System. Many thanks to seminar participants at the ISIR 13th International Symposium on Inventories and two anonymous referees who made very helpful suggestions and to Jennifer Young and David DeRemer who provided excellent research assistance. This paper was originally prepared for the ISIR 13th International Symposium on Inventories, Budapest, Hungary, August 23‐27, 2004. This version: September 2005. 1