This paper presents a model with money and credit with endogenous borrowing constraints and heterogeneous borrowing capacity. The analysis focuses on economies where collateralized credit plays an essential role. The model explores the effects of changes in the aggregate value of collateral on the number of agents that are borrowing constrained, real allocations, interest rates, and the liquidity premium of the asset that secures the loans. The results apply to a wide range of economies as long as inflation is not too low.
