Is collateralised borrowing an amplification mechanism?

The eff?ect of permitting collateralised borrowing in an otherwise standard business cycle model is examined. We find that powerful income e?ffects cause consumption to be far more volatile than in the standard model, and cause far higher demand for leisure following a positive productivity shock than is usual. These e?ffects are shown to inhibit capital accumulation and are capable of dampening the response of output to technology shocks. There are implications for existing models with credit market imperfections that abstract from labour supply behaviour.