lack of demand for building work. the household sector experienced some financial strain as job losses constrained disposable income. although most indicators show that the decline in the real economy had bottomed out in the first half of 2009, consumers were, until the third quarter of 2009, still somewhat pessimistic about the prospects for future performance of the economy and its impact on their finances. the elevated rate of unemployment continued tight lending conditions and a need to address weaker household balance sheets are expected to continue to impact consumption expenditure negatively. also, on average, the credit standing of consumers has continued to deteriorate. i have briefly highlighted the key issues raised in the financial stability review. more detailed analyses are available in the publication itself, and will be highlighted by the authors ’ presentations. i trust that you will find these interesting, stimulating and relevant to the current environment and invite you to provide comment as part of the important process of ongoing debate on financial stability. thank you.

cross the boundaries into other fields. we noted for instance in the monetary policy committee statement our concerns about the debt crises in advanced economies and considered in our discussions the possibilities of how this crisis might be resolved. this general increase in uncertainty has become a characteristic of the post - recession world, and one that appears especially hard to cast off. uncertainty demands a greater application of judgement across a broader range of perspectives than in times when variables move in clear directions and risks are low. 3. conclusion these thoughts prompt us to recognise that flexibility is a key ingredient of useful macroeconomic forecasting exercises, even as flexibility may seem to violate the very idea of a model. this tension is in fact quite important. the inflexibility of a model ’ s fixed relationships help us to assess whether today ’ s actual outcomes will continue in the future or adjust in line with the historical relationships reflected in the model. as real world outcomes change, we in turn ask ourselves what is wrong with our model relationships or what other conditions have changed to generate outcomes beyond what the model suggests. in short, the framework used to produce forecasts must be dynamic and able to change should circumstances require. one area for future work for us in the reserve bank is to incorporate the lessons of the financial crisis and recession into how we use our macro econometric and other models. the financial crisis that has occurred was so unexpected that very few, if any, macroeconometric models captured the inter - linkages between the real and the financial spheres. beyond interest rates, macro econometric models generally do not include financial transmission mechanisms. clearly this needs to change, but we also need to recognise that even much more extensive coverage will not compensate for intensive regulatory focus on financial and asset markets and the balance sheets of institutions operating in them. and from a policy - making perspective, we need to recognise that whatever progress we make in refining and calibrating our models, and achieving a higher level of their sophistication, they will never be able to absolve us from our responsibility to ultimately exercise judgement in reaching any policy decisions. thank you. bis central bankers ’ speeches