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Inventory Investment, Internal-Finance Fluctuations, and the Business Cycle

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IT IS A well-known fact that inventory disinvestment can account for much of the movement in output during recessions. Almost one-half of the shortfall in output, averaged over the five interwar business cycles, can be accounted for by inventory disinvestment, and the proportion has been even larger for postwar recessions. A lesser-known fact is that corporate profits, and therefore internal-finance flows, are also extremely procyclical and tend to lead the cycle. Wesley Mitchell finds that the percentage change in corporate income over the business cycle is several times greater than that in any other macroeconomic series in his study. Robert Lucas lists the high conformity and large variation of corporate income as one of the seven main qualitative features of the business cycle.3 The volatility of internal finance, which is also commonly referred to as cash flow, continues to be a salient feature of postwar cycles.



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