Economic Quarterly

This article investigates the cyclical properties of different components of working capital, with special attention to the correlations across time with output and cash flow to firms. The findings are as follows: First, inventories lag business cycles before 1984 by about three quarters. However, the lead-lag relationship becomes shorter in the more recent period. Second, cash holdings broadly defined to include short-term investments commonly lead the business cycle, consistent with the cash-in-advance model for short-term production decisions. Finally, trade credit lags the business cycle by a small amount.