The Impact of Inflation on the Monetary Stocks of the Firm

Abstract

This empirical examination provides preliminary evidence on the ability of companies to manage monetary working capital during an inflationary period. Changes in monetary working capital are disaggregated into volume, inflation, and residual (behavioral) components. After eliminating the volume effect, many firms still had large monetary stock changes. The residual or behavioral factor frequently accounted for a greater change in the balances than changes in prices. Thus, an accounting or financial planning estimate of a monetary working capital balance that is adjusted for volume and inflation price changes is not sufficient to explain changes in monetary working capital balances. Financial managers need to establish forecasting, monitoring, and control procedures to better manage monetary working capital stocks.