business community. it is you, after all, who, in the pursuit of profit, have to seek out the opportunities for new products and markets, better ways of organising business activity, and better ways of motivating your employees and tapping and developing their human capital. in the simple growth accounting exercises used to measure productivity, the source of the genuine improvements in productive techniques is not considered ( though there is a considerable separate literature aimed at establishing that ). but productivity does not get handed down from somewhere – it is the outcome of the efforts of people across the economy to find better ways of doing things. what macroeconomic policy can contribute to this endeavour is a measure of stability. we will never be rid of the business cycle, nor of the tendency for businesses, households and especially financial markets, to alternate between moods of optimism and pessimism. but through the past decade or so, the australian economy has been somewhat less volatile from year to year than it used to be. that may be explained partly by smaller shocks hitting us from abroad for much of the 1990s ( though both the asian crisis and the global recession of 2001 were big shocks ). the economy's capacity to handle shocks has also improved, a factor due in some degree to the liberalising reforms themselves. i would argue that macroeconomic policies have played a role too, and in particular that a monetary policy regime which seeks to respond to the likelihood of significant build - ups of inflationary or disinflationary pressure, has made its contribution. it is, of course, our intention to continue in that vein. conclusion in most respects, the global situation, while not without uncertainty, is better than it was a year ago. a renewed expansion in the world economy may well be beginning, though it will probably be moderate, rather than strong. even though we do not want to throw our hats too far in the air just yet, it is very encouraging to see such signs. australia has come through the international difficulties well to date. in an underlying sense, we have slower growth than we experienced in the late 1990s, and slower growth than we would ideally like to sustain in the medium term. but we have not had the deep slump characteristic of earlier world downturns, and the probability of experiencing one soon seems recently to have diminished. this is good news, and perhaps should have us all casting our minds past the short term, towards the question of how to sustain good, stable growth, and good productivity performance, into

in 2006. but perhaps the reason for the attention is the feeling that the trend could continue for some time. in essence, many of these transactions are based on two fundamental premises : the return on equity is high, and has in recent years been unusually stable as well ; and the cost of debt is low. those offering high prices for businesses are essentially betting that, over the next several years, they can enhance returns by increasing leverage. to some extent, they may also feel that in a private - ownership structure they can do some things to improve long - run performance of the company that current shareholders would not tolerate because of short - term damage to earnings and share prices. but mainly, the strategy is one of leverage. if this analysis is correct, then corporate leverage, and the associated exposures around the financial system, could be rather more prominent as an issue over the next five years or so than it has been for a couple of decades. going back to the fsap stress tests for a moment, it is likely that the results would have been more worrying had the leverage of the corporate sector been considerably higher. but we shall have to leave a more detailed discussion of such issues to another occasion. for now, it is time to conclude. conclusion finance and growth go together. it was no accident that the acceleration in growth in the industrial revolution was associated with the development of modern banking and capital markets. by the same token, disruption to the financial sector is costly to the real economy, as is only too clear in history. the role of public policy is to respond to these disruptions forcefully if and when they occur to preserve the stability of the system, but in the good times to work hard at fostering a climate of careful risk assessment in the relevant institutions and markets. for the past 15 years or so, the financial system in australia has worked remarkably smoothly to assist the economy. a very large change in the household sector ’ s balance sheets has made households more sensitive to changes in their circumstances, but financial institutions have continued to perform strongly. the challenge remains for these institutions, and all of us, to understand how risk is changing in this new environment, and to remain aware that we may at some stage face less forgiving circumstances than we have enjoyed over the past decade. we need also to be alert to the shift in the wind in the area of corporate leverage that seems to be occurring. i suspect we will be talking about that for some time to come. in the interim,