Industrial Production, Volatility, and the Supply Chain

The issue of production volatility is important to firms interested in managing their supply chain. This paper empirically estimates the volatility of industrial production using the GARCH and EGARCH time series models. Three questions are addressed: Can volatility be predicted? Is the effect of unexpected changes in production on volatility asymmetric? And, how persistent is volatility following a production disturbance? The results indicate that production volatility is time varying and can be predicted in the majority of cases examined, and that overestimates of production lead to greater increases in volatility than do underestimates.