- sectional heterogeneity in income and wealth, the so - called heterogeneous agent models, or bewley - huggett economies. the main takeaway from these earlier models is that one could rationalize the low observed real interest rate, inconsistent with representative agent models with complete markets, in a model in which households have precautionary savings motives to insure against income shocks. in this framework, the degree of income uncertainty and credit constraints shape wealth inequality and imply a real interest rate in equilibrium that better resembles that in the data. another key development was the widespread increase in access to large - scale microdata, which helped the profession to evaluate existing economic theories and build better economic models. microdata has been a cornerstone to the inclusion of heterogeneity into macroeconomic models, as it allows a deeper understanding of individual behaviors. without it, theoretical models could not be adequately tested. for 2 / 5 bis - central bankers'speeches example, the work by benjamin garcia, mario giarda, and carlos lizama that will be presented in this conference combines location - based microdata on credit and debit card transactions with income surveys to show that fiscal policy programs that focused on lower - income regions are associated with larger consumption responses, as predicted by models of heterogeneous agents with liquidity constraints. these theoretical and empirical advances in the literature were complemented by the improvement of computational capabilities. these gave rise to the recent development of the so - called heterogeneous agents new keynesian model or hank model, which incorporated important features that improved the standard new - keynesian - model'fit to the data and introduced new transmission mechanisms of monetary policy. one of the main lessons from these models is that the direct effects of monetary policy on consumption, the so - called intertemporal substitution channel, can be very small compared to its indirect effects on income, which are shaped by general equilibrium forces that depend on the characteristics and behavior of households. another important recent theoretical development is the model of heterogeneous firms and financial frictions, which alters the way we think about the transmission of monetary policy. while the empirical evidence suggests small effects of monetary policy on aggregate investment, the use of disaggregated data allowed us to observe that investment of firms with " good " financial conditions reacts strongly to monetary policy but not so the investment of financially constrained firms. therefore, the effect of monetary policy depends on the distribution of firm

rate swaps, clears about half of global single - currency swaps between dealers. assessing recent financial market performance now that i have laid out a conceptual framework about markets and how participants ensure the quality of transactions, i would like briefly to apply that conceptual framework to the events of the past 18 months. financial crisis can serve as a powerful stimulant to the evolution of market mechanisms, and i expect that the aftermath of the present turmoil will see both innovation and incremental refinement to quality assurance in credit markets and in counterparty credit risk management. i would like to highlight two themes that i believe will influence this process. first, for quality assurance to be effective, some of the products traded in financial markets have to become simpler and more transparent. product complexity and a lack of transparency are at the root of many of the problems that have emerged, especially in the markets for securitizations and structured credit products. i elaborated on these themes in remarks i made at a federal reserve conference last week on the future of the mortgage market. 4 there i argued that a recovery in the market for mortgage - backed securities ( mbss ) will require greater transparency and less complexity, and importantly, comprehensive and standardized loan - level data that will allow more independent credit analysis. for example, the structures of cash flows from mortgage payments in the pool to the various tranches of mbss should be much less complex than some of those created in recent years, and securitization contracts will need to be made more homogeneous so as to allow greater comparability of risk profiles across deals and perhaps promote more robust liquidity. i believe that a new infrastructure for mbss built upon these foundations might be reasonably expected to lower the costs of information production and processing in the marketplace. the reduction of these costs will facilitate broader independent credit analyses, greater due diligence by potential purchasers, and, hence, greater ability to provide a double check on credit rating agencies'evaluation of the riskiness of the securities. in other words, market participants would be more likely to acquire the expertise to evaluate securities issues that were more homogeneous and less complex. a second key factor for effective quality assurance relates to the institutional and contractual framework for ensuring future performance on financial transactions, namely counterparty credit risk management. counterparty credit risk management should be focused on its effectiveness in different market situations and its implications for financial stability. there is a broad class of market practices that can provide useful protections when an individual firm experiences