Abstract This chapter is a theoretical study into how credit constraints interact with aggregate economic activity over the business cycle. In particular, for an economy in which credit limits are endogenously determined, we investigate how relatively small, temporary shocks to technology or income distribution might generate large, persistent fluctuations in output and asset prices. Also we ask whether sector-specific shocks can be contagious, in the sense that their effects spill over to other sectors and get amplified through time.