Abstract
Following the example of Kiyotaki and Moore (1997), a major strand of the literature has used models incorporating collateral constraints to amplify the effects of shocks on economic activity. However, recent papers have demonstrated that collateral constraints per se are unable to propagate or amplify exogenous shocks, unless unorthodox assumptions concerning preferences and production technologies are assumed. In this paper, I examine how the degree of friction in the credit market affects the amplification of productivity shocks to output. I demonstrate that even when using standard assumptions, a very stylized model incorporating collateral constraints can amplify productivity shocks.