Quantitative Significance of Collateral Constraints as an Amplification Mechanism

Do large fluctuations arise from small shocks through financial frictions? In previous literature it is shown that a collateral constraint on intertemporal debt for consumption smoothing does not have a quantitatively significant effect on the response of output to unexpected shocks. We additionally focus on the collateral constraint on intratemporal debt for wage payments and examine the amplification of output. We find that output is significantly amplified in a standard functional form and parameter region. We also find that the region of the parameters for which the output is amplified is wider than that of previous literature.