Firms and Aggregate Dynamics

26 Pages Posted: 5 Jan 2005

See all articles by Francesco A. Franco

Francesco A. Franco

Universidade Nova de Lisboa

Thomas Philippon

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: October 2004


We investigate the role of permanent and transitory shocks for firms and aggregate dynamics. We directly model the dynamics of a large panel of firms. We find that permanent shocks to productivity and permanent shifts in the composition of output explain at least 4/5 of firms dynamics. However, these permanent shocks are almost uncorrelated across firms, and are therefore less relevant for aggregate dynamics. Transitory shocks, on the other hand, are not very important at the firm level. However, because they are significantly correlated across firms they account for most of the volatility of aggregate hours and output. We also show that not using firm level data leads to misidentification of the permanent shocks. Finally, we try to make some progress on the interpretation of the shocks. We show that monetary shocks cause only transitory dynamics, while oil shocks also have permanent effects. We find that public spending shocks have a positive transitory effect, and that tax shocks have a negative transitory effect. We also find some evidence suggesting that both spending and tax shocks have negative permanent effects.

Keywords: Technology shocks, business cycles, long-run restrictions

JEL Classification: E2, E3

Suggested Citation

Franco, Francesco A. and Philippon, Thomas, Firms and Aggregate Dynamics (October 2004). Available at SSRN: or

Francesco A. Franco

Universidade Nova de Lisboa ( email )

Campus de Campolide
Lisboa, 1099-032

Thomas Philippon (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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