The financial friction affects the economy only when the collateral constraint is not binding todaybut can bind tomorrow with a positive probability. In particular, a shock ( ̃e) to the endowmentreceived by households, if large enough to make the collateral constraint binding, will lead to adownward spiral of declining consumption, falling asset prices, and tighter borrowing constraintstypical of financial accelerator models, such as Bernanke, Gertler, and Gilchrist (1996) and Kiy-otaki and Moore (1997). We label states in which the collateral constraint is binding as “crisis