This paper motivates a propagation mechanism in the context of an intertemporal production economy with asymmetric information, and with borrowers and lenders who enter multi-period relationships. A key feature is that aggregate output and borrowers' financial capacity-the maximum overhang of past debt they may feasibly carry-are determined jointly, much in the spirit of Gurley and Shaw (1955). Expectations of future economic conditions govern capacity which in turn may constrain current production, especially in bad times. A small but persistent shift in aggregate conditions may have a large impact on capacity, making the framework capable of motivating large endogenous fluctuations in constraints. Understanding how small disturbances can induce large output fluctuations is an on-going quest in macroeconomics. This paper develops a simple framework in which shifts in aggregate economic fundamentals are amplified through their impact on conditions. A distinguishing feature is that output and borrowers' financial capacity-the maximum overhang of past debt they may feasibly carry-are determined jointly, much in the spirit of Gurley and Shaw (1955). Expectations of future economic conditions govern capacity, and capacity may constrain current production, especially in bad times. A number of recent papers have resurrected the view that factors may play a part in propagating business fluctuations.' The underlying theories exploit the idea that, with asymmetric information between borrowers and lenders, agency costs may drive the price of uncollateralized external funds above the price of internal funds. In this kind of setting, a borrower's position is a key determinant of the terms of credit she faces. In the aggregate, swings in borrower balance sheets over the cycle amplify fluctuations in investment and output, essentially by inducing counter-cyclical movements in the required premium for external finance. This simple mechanism is broadly consistent with informal descriptions of how and real variables interacted in the Great Depression (Bernanke (1983)) and in the postwar business cycles (Eckstein and Sinai (1986)). In addition, numerous recent panel data studies, beginning with Fazzari, Hubbard and Peterson (1988), support the notion of a investment accelerator mechanism.