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One of macroeconomists’ major concerns is GDP volatility, and understanding what causes this volatility is essential when attempting to reduce it. For decades, the automotive industry has been a major component of US GDP. Therefore, understanding the driving forces behind this industry indirectly contributes to the study of GDP volatility. This paper focuses on CAFE standards and how they change the effect of oil prices on US automobile sales.

What motivates this paper is the fact that during the mid-to-late 80s, fluctuations in the market share of domestic automobile manufacturers diminished substantially. Figure 1 presents the sales of domestic automakers’ automobiles as a fraction of the domestic market (market share) from January 1974 to June 2004. One can easily notice that around month 170, which corresponds to February 1988, there is a dramatic decrease in volatility. What could be the cause in the decrease of this volatility? [excerpt]