around that outcome, with an increase in the frequency of extreme temperatures. this volatility is highlighted in the first graph in the recent bureau of meteorology ( bom ) and csiro report,. the report states that ‘ australia ’ s climate has warmed by just over 1 degree c since 1910, ', and expects further warming over the next decade. [ 3 ] these extreme events may well have a disproportionately large physical impact. heat events state of the climate leading to an increase in the frequency of extreme https : / / www. rba. gov. au / speeches / 2019 / sp - dg - 2019 - 03 - 12. html 2 / 10 3 / 13 / 2019 climate change and the economy | speeches | rba there is also a greater possibility of compound events, where two ( or more ) climatic events combine to produce an outcome that is worse than the effect of one of them occurring individually. combined with the increased volatility, this increases the likelihood of non - linear impacts on the economy. both the ipcc and the bom / csiro reports highlight the changed environment that the economy will need to adapt to. they also provide evidence on what change is predetermined and what can be affected by actions to strengthen the global response to the threat of climate change. these issues are central to businesses, households and government. the policy environment has a key effect as well as the climatic environment. it is worth noting that the effect on the australian economy is not just a function of the domestic political environment, but also that of other countries, most notably our trading partners. i will return to this later. climate change, economic models and monetary policy the economics profession has examined the effects of climate change at least since nobel prize winner william nordhaus in 1977. since then, it has become an area of considerably more active research in the profession. [ 4 ] there has been a large body of research around the appropriate design of policies to address climate change ( such as the design of carbon pricing mechanisms ), but not that much in terms of what it might imply for macroeconomic policies, with one notable exception being the work of warwick mckibbin and co - authors. how does climate affect monetary policy? monetary policy's objectives in australia are full employment / output and inflation. hence the effect of climate on these variables is an appropriate way to consider the effect of climate change on the economy and the implications for monetary policy. the economy

have historically held sizeable shares of australian government debt. while there is limited evidence to date that the program of quantitative easing in japan has encouraged investors to substantially increase their purchases of other countries ’ assets, the most recent data suggest that demand for australian debt from japanese investors has started to pick up. bis central bankers ’ speeches notwithstanding the possibility of these flows from japan, the net implication of these developments is that one might expect to see reduced capital inflows in the period ahead, with the possibility of a consequent further decline in the australian dollar. this would help in achieving balanced growth in the economy. that said, the ability of economists to forecast exchange rate movements is notoriously poor, but at least this might give you some idea of some of the dynamics at play in the period ahead. concluding remarks to conclude, the main purpose of my speech today has been to run you through some of the notable changes in the composition of capital flows into australia that have taken place over the past seven years or so and indicate how they might evolve in the period ahead. the major developments have been firstly, a marked reduction of net offshore debt issuance by the australian banking sector ; a trend which may be expected to continue for a while yet. secondly, there has been a sizeable capital inflow ( at least notionally ) to fund the resources investment boom. as that investment boom is now transitioning into the production and export phase, these capital inflows may be expected to decline and their composition change. the third main development has been a marked increase in foreign holdings of australian government debt. while this might not increase much further from here, nor is it likely to decline anytime soon. bis central bankers ’ speeches