. however, those constraints have eased over time. more recently, external financing has become widely available at very favourable cost. primarily, this reflects the stance of monetary policy ( both in australia and abroad ), which is delivering historically low levels of interest rates, ample liquidity and has helped to push up equity prices. indeed, a common refrain of firms in the course of our business liaison has been that neither the cost nor the availability of external finance have been factors limiting investment of late. moreover, ( non - financial ) corporate balance sheet data indicate that many australian companies currently hold relatively high levels of cash, suggesting that they have access to resources to finance investment when the time comes. the exchange rate is too high? the exchange rate has declined somewhat relative to its peak in the first half of 2013. but it remains high, especially given the sizeable decline in commodity prices this year. the implications of this vary across traded and non - traded sectors. a further decline in the exchange rate would provide additional support to demand for domestic firms producing tradable goods and services. at the same time, however, the high exchange rate also means that imported capital goods are currently relatively cheap. hence, the still - high level of the exchange rate may be a net positive factor for the investment plans of some firms in non - tradable industries. for firms in tradable industries, on the other hand, the low cost of imported capital is offset by the effect of the high exchange rate on the demand for the goods and services they produce. in short, the high exchange rate might be playing a part in restraining investment in some sectors of the economy, but it ’ s unlikely to be the full story. animal spirits are too weak? what is often referred to as “ animal spirits ” consists of three key elements. 3 first, there is uncertainty, which describes the range of possible outcomes, let ’ s say for demand, but other things like costs matter too. second, there is the expected or most likely outcome. together, these describe the distribution of possible outcomes. but firms ’ willingness to invest also depends on the third element, which is their appetite for risk. i ’ ll consider each of these elements in turn. the outlook is too uncertain? on the surface, uncertainty seems like an appealing explanation for subdued investment. however, we should remember that firms always have to make investment decisions in an environment of uncertainty, not just about the prospects for the macroeconomy but also for their industry

. i also note that some of the pessimism about productivity is happening alongside great optimism in some quarters about a new industrial revolution built on better algorithms. the truth may well lie somewhere in the middle. it might also take a while to assert itself. those of us who remember the 1990s would recall that there have been previous episodes where considerable innovation seemed to be happening, but this took a while to be evident in the productivity data. this is because firms take a long time to adapt their business models and processes to the new technologies. and the greatest spur to change is capacity constraints. tight economies spur process innovation. when there is plenty of spare capacity, not even strong competition necessarily induces higher rates of adoption of new technologies. risks to the outlook taking all that into consideration, there seems a reasonable prospect that – as long as nothing really bad happens – this global expansion could continue for a while. this is especially so if the technology optimists are right about the implications of recent innovations. but of course there are risk scenarios that have the potential to derail the current economic momentum. foremost of these at present would be geopolitical risks. these are particularly difficult risks to integrate into a macroeconomic analytical framework. we aren ’ t political analysts. and i question whether anyone can truly know what the odds of certain events occurring might be. but we can at least think about what those risks might be and whether they might be increasing or receding. i think it is fair to say that geopolitical risks in europe and specifically the euro area have receded. while it remains to be seen how brexit will play out from a practical perspective, an existential crisis for the euro area and the eu more broadly no longer seems so close. against that, geopolitical risks in asia have increased. these are the low probability, high - impact events that can only ever be a risk to one ’ s forecasts. until something actually happens, they do not and should not affect the central scenario. even if you knew for sure that an event happened, the economic effects are often difficult to predict. financial risks will also be ever - present as risks to a macroeconomic outlook, and they are almost as hard as geopolitical risks to quantify. one that seems to be becoming less pertinent at 8 / 10 bis central bankers'speeches the moment is the international risk posed by ongoing low interest rates and the resulting search for yield by investors. now that policy interest rates globally