Cash Flow Effects on Economic Growth

By Martin, Miguel-Angel Galindo; Picazo, Maria-Teresa Mendez | International Advances in Economic Research, May 2002 | Go to article overview

Cash Flow Effects on Economic Growth


Martin, Miguel-Angel Galindo, Picazo, Maria-Teresa Mendez, International Advances in Economic Research


Policy makers have traditionally considered the macroeconomic relations and the variables that can affect the economic objectives that they pursue, such as prices, employment, balance of payments, and economic growth. Recently, microeconomic behavior has also been considered. To complete the analysis, it is necessary to include those variables that define the firm's evolution and activities, and cash flow could be this kind of variable to be included in the analysis. The main objective of this paper is to show the relationship between cash flow and one of the final economic policy targets, economic growth. This paper considers the relationship between cash flow and applied economics, then develops the effects of cash flow on economic growth. (JEL: 040)

Introduction

In applied economic analysis, decision makers have considered the variables that can affect the economic objectives that they pursue, such as prices, employment levels, balance of payments, and economic growth. These studies have been macroeconomic in nature, although in recent years, microeconomic behavior has also been considered. In spite of this new perspective, variables of managerial character are not usually included, so policy makers have no information about the effects that their measures have on the firm's evolution.

Therefore, the design and the derived effects of an anti-cyclical economic policy have been studied without considering their incidence on the evolution and plans of the firms. Generally, they have tried to affect investment decisions through an expansion of demand and interest rate variations.

To complete such analysis, it is necessary to include those variables that define the firm's evolution and activity. If this type of analysis is able to be developed, it is easy to know how to affect such variables and the effects of such variation on the firm's evolution. One will also be able to understand the effects of this variation on the final economic policy targets. Cash flow could be this kind of variable to be included in the analysis.

The main objective of this paper is to show the relationship between cash flow and one of the final economic policy targets, economic growth. The next section considers the relationship between cash flow and applied economics, followed by a development of the effects of cash flow on economic growth. The last section of the paper includes the main conclusions of the study.

Economic Policy and Cash Flow

It is well known that the activities carried out by firms are influenced from internal and external points of view. The internal view implies that, the decisions adopted in the core of the firm will affect the behavior of other functions, such as production, financing, and distribution. The external view considers the effects of firm productivity on various economic sectors and how economic policy could affect firm behavior. The latter will be considered in this paper.

When the policy maker designs measures, the main economic objectives and the variables that could help to obtain these results have to be considered. In this sense, factors such as interest rates, public consumption, and money supply are some variables that are usually considered from a macroeconomic point of view. From a microeconomic point of view, however, cash flow could also be taken into account.

According to Riebold [1969, p. 24], cash flow is the internal flow of the generation and use of money over a certain period of time. Accordingly, variations of cash flow affect the firm's production decisions [Rivera, 1989]. If there is an increase in cash flow, then production will most likely increase, indirectly improving economic activity (for example, through employment rates and economic growth).

In general terms, the policy maker could affect cash flow using fiscal or monetary policies. The effects of fiscal policy on cash flow are shown in Figure 1. …

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