inflation. incidentally, before the clamour for more detail of the nature of these models grows too loud, i should state that the models, and the taylor rule research we have carried out, have all been in the public domain for some time. 4 while all this is occurring in the economic area, our colleagues in the financial markets group have had a parallel process going on, with a particular focus on assessing developments in international and local financial markets. once the two areas have had a chance to form preliminary views, the senior management of the two groups meet to compare notes. this is important for ensuring that for the bank as a whole, our reading of the economy and the policy options has integrated financial developments with the " real " side data as far as possible, and that the policy options worked up have taken proper account of financial market dynamics and expectations. board materials at this point, it is useful to say something about the documents for the board meeting. economic group prepares a paper called " the economy and monetary policy ", which summarises our analysis of economic conditions, provides a summary of the outlook and sets out the policy issues we believe the board should have in mind for the forthcoming meeting. the paper has a four to five page overview essay prepared by the senior management. it also has detailed supporting documentation including tables, charts, and forecasts etc as attachments, prepared by the staff. a companion paper from the financial markets group containing a comprehensive treatment of developments in financial markets is also prepared. about a week prior to the board meeting, draft versions of these papers are circulated to a policy discussion group ( pdg ), made up of the most senior management of the bank, and the governor and deputy governor. the governor then convenes a meeting of that group to discuss the policy situation and the draft papers. the discussion is fairly broad ranging, and benefits from the fact that a number of senior colleagues attend who are familiar with the broad issues associated with monetary policy, but whose every - day job is to think about other things. these people bring a fresh perspective to the issues and offer quite substantive comments on the drafting of the papers, and the recommendations contained therein. this process helps to tighten up our thinking. following the pdg meeting, the papers are finalised and sent out to board members ahead of the weekend, so that they have time to peruse them prior to the board meeting on the tuesday of the following week. in our system, the final decision on

advice is, in fact, of the nature of detective work : trying to fit all the pieces together in a way which makes the most sense. usually, this proceeds by forming a working hypothesis about what is occurring in the economy, then being on the lookout for anomalies, and then hunting down why those anomalies are occurring, which may in turn lead to a revision of the original hypothesis. for example, is a key variable moving the way it should be, given our view of the outlook? if not, can a sensible reason for this be found? if it can ’ t, perhaps our working hypothesis is in need of amendment. one such question in recent months was : why were imports so weak? was it because the exchange rate was doing a lot of work to shift demand to domestic production? was it that much of the impact of the business sector inventory run - down was being reflected in imports? or was domestic demand in fact much weaker than we thought? or all three of the above to some extent? another was whether the large fall in full - time employment in july was consistent with other information about the labour market ( it wasn ’ t ). yet another was whether the large fall recorded in business credit in july was a genuine signal or was affected significantly by technical changes in the way the data are compiled and shifts in seasonal patterns driven by changes to the tax system. in this case, statistical doubts don ’ t seem to be enough to remove the impression that business credit is quite weak. the analysis is not entirely focused on official statistics. as you know, the bank has in the past year upgraded its economic liaison capacity, establishing regional offices in melbourne, perth and brisbane. we have recently added an economist in adelaide, who is attached to the bank ’ s branch in that city. while we have for many years undertaken regular liaison with major retailers, the offices have been quite active in developing additional contacts in the business community, state governments, industry groups and academia. their work is coordinated from sydney and we make considerable effort to ensure the results are integrated into head office ’ s evaluation of the economy. each month, an economist from one of the offices has the responsibility of distilling the insights gained from the collective liaison effort into a document, and will travel to sydney to present the results at the staff meeting. to date, we have been pleased both by the reception our liaison visits have received, and by the insights we have gained into some topical issues on which there is