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As has been widely observed, the volatility of GDP has declined since the mid-1980s compared to the prior years. One leading explanation of this decline is that monetary policy significantly improved in the later period. We utilize a cross-section of 2-digit manufacturing and trade industries to further investigate this explanation. Since a major channel through which monetary policy operates is through variation in the federal funds rate, we hypothesized that more interest sensitive industries should have experienced larger declines in the variance of their outputs in the post-1983 period. We estimate interest sensitivity measures for each industry from a variety of VAR models and then run cross-sectional regressions explaining industry volatility ratios as a function of their interest sensitivity measures. These regressions reveal little evidence of a statistically significant relationship between industry volatility reductions and our measures of the industry interest sensitivity. This result poses challenges for the hypothesis that improved monetary policy explains the decline in GDP volatility. Keywords: GDP volatility; Monetary policy; Great moderation

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 [Ramey, V.A., Vine, D.J., 2003a. The Effects of Sales Persistence on Volatility in a Production Smoothing Model. Draft dated November 18; Ramey, V.A., Vine, D.J., 2003b. Tracking the source of the decline in GDP volatility: an analysis of the automobile industry. Unpublished Working Paper, presented on the ASSA program, San Diego, January 2004]. 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. Keywords: GDP volatility: Sales persistence; Great moderation; Inventory: Production

This paper reports the results of a detailed examination of the hypothesis that improved inventory management and production techniques are responsible for the decline in the volatility of U.S. GDP growth. Our innovations are to look at the data at a finer level of disaggregation than previous studies, to exploit cross-sectional heterogeneity to obtain clearer identification of this hypothesis, and to provide a complete decomposition of the change in GDP volatility. At the aggregate level, changes in inventory behavior can account directly for almost half of the total reduction in GDP volatility. However, reduced volatility of sales and lower covariance among the output of major sectors in the economy each account for more than one-fourth of the reduction in GDP volatility. Improved inventory management appears to be associated loosely with lower volatility at the industry level. Keywords: Inventory investment; Output; GDP volatility; Covariance; Business cycles; Stability

This paper documents econometrically that US Inventory to Sales Ratios have time trends and that there have been significant breaks in these time trends at both the aggregate and industry level. Using techniques developed by Bai (Rev. Econ. Stat. (1997) 551) and by Bai and Perron (Econometrica 66 (1) (1998) 47), we simultaneously estimate the time trend parameters and the dates of statistically significant breaks in those trends. Using data from 1967 through 2001, it is estimated that aggregate Manufacturing and Trade Inventory to Sales ratio trended upwards at a 0.76%/year rate before 1985 Q3 and has trended downwards at a 1.29%/year rate since then. Downtrends are estimated to have begun in Manufacturing ratios in 1983, Wholesalers in 1985, and Retailers in 1990. Before the mid-1990s nearly all the reductions in ratios occurred in industries carrying durable goods. Examination of the timing and possible explanations of trend breaks for the 20 two-digit manufacturing industries suggests that breaks are much more likely to have occurred in recessions and may be related to changes in the variance of the industry's sales growth rate. Keywords: Inventory to Sales Ratios; Inventory; Trend breaks

Changes in traditionally constructed aggregate inventory to sales ratios are shown to not necessarily measure changes in underlying subsector inventory behavior. This is because while traditionally constructed aggregate inventory to sales ratios can be viewed as the weighted average of the underlying subsector inventory to sales ratios, the aggregation weights vary over time reflecting shifts in the composition of sales across the subsectors. For example, aggregate ratios can increase when most of the underlying subsectors are reducing inventory to sales ratios; this is shown to have been the case for the US Retail Sector. As a solution to this measurement problem, the use of fixed weight aggregate inventory sales ratios is proposed. These should help business cycle analysts and researchers better gauge the condition of inventories. Keywords: Aggregate inventory to sales ratios; Measurement problems; Macroeconomics

In contrast to earlier studies, we find that inventory holding in the US has become much more efficient since the mid-1980s. This result is found by examining trends in fixed weight aggregate inventory to sales ratios rather than traditional inventory to sales ratios, whose trends are shown to have been distorted by shifts in the composition of sales towards sectors carrying heavier stocks. Nearly all of the reductions in inventory holdings relative to sales are found to have occurred in sectors carrying durable goods. The adoption of just-in-time (JIT) and other inventory control systems by Durable Manufacturers is shown to have greatly reduced their inventory holdings. Keywords: Trends in inventory to sales ratios; Inventory; Macroeconomics; JIT