ABSTRACT
This chapter looks at the role of finance in the propagation of business cycles in Spain. It distinguishes between the short-term needs of business firms for working capital finance and credit borrowing to finance longer-term investment deficit spending. Business requires short-term credit to finance working capital expenditures before sale revenues are fully available. In the early 1970s, the falling share of internal funds in the business sector gross domestic product led to a sharp rise in retained earnings relative to profits. The chapter argues that after 1960s, the fluctuations in the business sector excess demand spending caused the short and medium-term growth cycles in Spain. The growth of credit in Spain declined after the economic recovery from the depression phase was under way. The chapter also argues that monetary policy for the entire period tried to balance the financial needs of private and public borrowers with the lending practices honored by the banking system.
