Production Adjustments for Consumer Durables and the Great Moderation

Explanations for the Great Moderation in GDP volatility have included improved management of inventory schedules, the good luck of smaller economic shocks, and better anti-inflation policy. This article provides direct evidence on the changes in production behavior underlying these explanations within a market model for consumer durable goods. Long-run price and sales elasticities are estimated using VECMs for 1959 through 1983 (period I) and 1984 through 2008 (period II). Significant and more effective adjustments to output growth in response to both market disequilibria and changes in demand occur in period II and contribute to the reduced volatility observed. During that time, 95 percent of market disequilibrium gaps were closed after four quarters, and current output adjusted to accommodate 90 percent of demand changes occurring during the preceding three quarters. © 2011 International Atlantic Economic Society.