/ 12 bis central bankers'speeches remained solidly positive in the aggregate ) and consumer spending for the economy as a whole. such a shift in an aggregate relationship would be difficult to understand or predict without using disaggregated data and models. more generally, studying the effects of household and firm heterogeneity might help us better account for the severity of the recession and the slow recovery. at the household level, recent research finds that heterogeneity can amplify the effects of adverse shocks, a result that is largely driven by households with very little net worth that sharply increase their savings in a recession. 9 at the firm level, there is evidence that financial constraints had a particularly large adverse effect on employment at small firms and the start - up of new firms, factors that may be part of the explanation for the great recession ’ s long duration and the subsequent slow recovery. 10 more generally, if larger firms seeking to expand have better access to credit than smaller ones, overall growth in investment and employment could depend in part on the distribution of sales across different types of businesses. modeling any of these issues quantitatively will likely require the use of a heterogeneous - agent framework. economists ’ understanding of how changes in fiscal and monetary policy affect the economy might also benefit from the recognition that households and firms are heterogeneous. for example, in simple textbook models of the monetary transmission mechanism, central banks operate largely through the effect of real interest rates on consumption and investment. once heterogeneity is taken into account, other important channels emerge. for example, spending by many households and firms appears to be quite sensitive to changes in labor income, business sales, or the value of collateral that in turn affects their access to credit — conditions that monetary policy affects only indirectly. studying monetary models with heterogeneous agents more closely could help us shed new light on these aspects of the monetary transmission mechanism. while the economics profession has long been aware that these issues matter, their effects had been incorporated into macro models only to a very limited extent prior to the financial crisis. 11 i am glad to now see a greater emphasis on the possible macroeconomic consequences of heterogeneity, including in work by economists at the federal reserve. 12 nevertheless, the various linkages between heterogeneity and aggregate demand are not yet well understood, either empirically or theoretically. more broadly, even though the tools of monetary policy are generally not well suited to achieve

inadvertently incorporate the former. most empirical models of the overall economy do not explicitly control for the influence of noninterest credit factors on consumption and investment ; as a result, estimated interest rate effects will partially reflect the influence of these factors to the extent these factors are correlated with interest rates. there are many reasons to suspect that this is the case. movements in interest rates influence a firm ’ s cash flow and the value of its collateral, all else being equal. higher interest rates also adversely affect consumer spending and especially residential investment, both by forcing households to devote a greater portion of their income to debt service and by making it more difficult to qualify for a loan because of maximum payment - to - income rules. evidence for these effects is provided by gertler and karadi ( 2015 ), who show that relatively small changes in short - term interest rates are correlated with large movements in credit costs. such correlations and interactions may explain why some types of spending appear to be more correlated with movements innominal interest rates than with real interest rates ; see fair ( 2004, ch. 3 ) for evidence on this point. finally, the relative contributions of relaxed lending standards, low interest rates, and other factors to housing bubbles, both in the united states and abroad, remains an open and unsettled topic ; agnello and shucknecht ( 2011 ) present cross - country evidence that monetary policy plays an important role, while dokko and others ( 2011 ) argue that monetary policy was a minor influence in the most recent episode. 15 see mian, rao, and sufi ( 2013 ) for an assessment of the role of leverage and housing wealth shocks in driving consumption during the great recession. work by justiniano, primiceri, and tambalotti ( 2015 ) suggests that debt overhang alone cannot explain the slow recovery from the great recession. 16 see yellen ( 2015 ) for a more extensive discussion. 17 in the economic literature, this general description of the inflation process is referred to as the expectations - augmented phillips curve. in its simplest form, the phillips curve relates inflation to expected inflation and the intensity of resource utilization in the economy. in practice, however, empirical specifications also typically include measures of supply shocks, such as changes in the relative prices of energy or imported goods, as additional determinants. two well - known variants of the phillips curve are the traditional “ accelerationist ” specification and the so - called new keynesian phillips curve ; the former approximates