Some lessons on incentives that stand out for me include: Guarding against technical design flaws that can be manipulated and exploited for profit; Ensuring that incentives are aligned and consistent with desired behaviors; Recognizing how rules, however well-intentioned, can be gamed; and, Having appropriate mechanisms in place to identify problems early and to ensure rapid escalation and amelioration. Many of these issues and risks likely also apply to your companies. But, I think they are particularly important for financial institutions—especially those that are systemically important. The scale of such firms magnifies the impact of bad incentives on the financial system and economy. At the same time, that scale also makes it more difficult for senior management to properly control a firm’s activities and monitor the conduct and behavior of its employees. For these reasons, we need strong internal and external checks on banks—an area to which I will now turn. The complementary roles of regulation, supervision, and culture As I said earlier, a sound financial system is one that is safe and resilient, can support the 3/8  BIS central bankers' speeches  provision of financial services at a reasonable price to the real economy in good times and in bad, and promotes confidence and trust among its customers and counterparties. Financial institutions should be prudently managed and subject to strong internal checks—including risk management policies and procedures, internal controls, compliance, and audit. Meanwhile, an effective financial regulatory and supervisory regime should be as efficient, transparent, and simple as possible.

To understand important economic concepts like full employment, financial security, productivity growth and the impact of education, it is vital to understand not just the average experience but rather how all cohorts of the population are faring. This understanding is important in and of itself, especially in evaluating the impact of critical trends affecting the economy, like technological innovation or demographics, as well as the policies intended to respond to the impacts of those trends. We cannot fully understand whether policies have improved social welfare unless we understand how the impact of those policies varies across individuals. But understanding heterogeneity is important even if we are just examining policy impact in the 1/2  BIS central bankers' speeches  aggregate. The most innovative macroeconomic models, those at the frontier of current economic work, recognize heterogeneity across consumers in assessing how monetary and fiscal policy changes are transmitted through the economy. These models incorporate individuals with different marginal propensities to consume, with different amounts of wealth or access to borrowing, or who face different risk exposures, such as the chance they become unemployed, over the business cycle. Incorporating these factors can yield quite distinct insights about how changes in monetary or fiscal policy can affect growth, employment, wages and inflation. For those who want to know more, we published a blog post on Monday of last week that describes the output of just such a model.