Credit Cycles

Theoretical studies have shown that under unorthodox assumptions on preferences and production technologies, collateral constraints can act as a powerful ampliÞcation and propagation mechanism of exogenous shocks. We investigate whether or not this result holds under more standard assumptions. We Þnd that collateral constraints typically generate small output ampliÞcation. Large ampliÞcation is obtained as a “knife-edge” type of result. JEL classification: E32, E44 Keyworkds: collateral constraints, business cycles, heterogeneous agents. ∗We thank Daniele Coen-Pirani, David DeJong, Narayana Kochelakota, Jack Ochs, three anonymous referees, and participants to seminars at the universities of Texas, Houston, Pittsburgh, Rochester, the Stanford Institute for Theoretical Economics Workshop 2002, the 2003 Midwest Macroeconomics Conference, 2003 SED Conference, 2003 Latin American Meeting of The Econometric Society, and the Federal Reserve Bank of Richmond for useful comments. Usual disclaimer applies.