Abstract: This paper offers a framework to study the macroeconomic effects of a credit shock, defined as a sudden spike in loans relative to deposits, in an environment in which banks have endogenously-persistent lending relationships with their borrowers. The contribution of this work is to provide a setup that shows how credit shocks interact with bank-firm lending relationships, affect economic activity and drive macroeconomic fluctuations. In presence of lending relationships, a positive credit shock in this model leads to large macroeconomic fluctuations which are absent when lending relationships are not considered. These effects are increasing in the intensity and persistence of lending relationships. Further, higher volatility and persistence of credit shocks lead to increased amplification of macroeconomic volatility which is magnified by presence of lending relationships.