christopher kent : economic forecasting at the reserve bank of australia address by mr christopher kent, assistant governor ( economic ) of the reserve bank of australia, to the economic society of australia ( hobart ), university of tasmania, hobart, 6 april 2016. * * * accompanying charts can be found at the end of the speech i thank daniel rees, who provided invaluable assistance in preparing these remarks, and is the head of the bank ’ s new macroeconomic modelling section ( see below ). introduction let me start by thanking the university of tasmania and the tasmanian branch of the economic society of australia for hosting this event. today i am going to talk about economic forecasting, which plays an important role in policy deliberations at the reserve bank of australia ( rba ). it assists in interpreting economic developments and, because monetary policy typically affects economic activity and inflation with a lag, it is a necessary part of determining and communicating the appropriate stance of policy. i ’ m also going to discuss the results of an external review of our forecasting methods and processes, which we have just published, and our responses to the recommendations therein. our current approach to forecasting has been in place for some years. while it has served us well, we thought it was time to consider whether our methods and processes would continue to be appropriate and how we might improve upon them. to do this, we commissioned two eminent economists to conduct a review, professor adrian pagan of the university of sydney and dr david wilcox of the federal reserve board of governors. 1 the existing approach to forecasting at the rba the process of economic forecasting actually involves a wide range of activities. the most familiar relates to the construction of forecasts that reflect our best estimates of future economic outcomes. 2 each quarter in the statement on monetary policy, we publish forecasts for australia ’ s major trading partners ’ gdp growth, as well as australia ’ s terms of trade, gdp growth, unemployment rate and inflation over the next two - and - a - half years. however, these numbers are just a summary of an extensive process in which our analysts incorporate incoming data, assess the relevance of new events, construct forecasts for a large number of economic variables, analyse various scenarios and consider a range of key risks to the outlook. all of this provides a useful framework to guide policy deliberations and then communicate those decisions. this process may lead us to revise the economic outlook – either in response to unexpected developments or

the 1. 8 % enjoyed by the countries that would go on to form the euro area. however, between 1986 and 1998, before the euro was introduced, spain ’ s per capita income grew at an extraordinary annual rate of 2. 7 %, above the average for future euro area countries of 2. 1 %. the arrival of the euro also had a positive effect on growth, in spite of the serious difficulties during the crisis. since 1999, gdp per capita has been growing at 1. 2 %, which is 0. 1 % higher than in the other euro area countries and much higher than during the early years of our democracy. recently, some people have tried to blame the euro for the length of the financial crisis in spain and have advocated control over monetary policy interest rates and exchange rates. what they 1 / 2 bis central bankers'speeches often forget is that being a member of the euro area enables spanish households and businesses to benefit from lower real interest rates, lower inflation rates and reduced macroeconomic volatility, all of which boost productive investments and make a vital contribution to the sustainability of public finances. furthermore, it is not true that structural currency devaluations solve economic crises. devaluations are short - term measures. in the long term, the competitive boost they provide is eroded by the higher inflation they cause. and, in a complex system of global production chains like the one we have today, devaluations can make it harder for businesses to plan. the euro is also the second - most important currency in the international monetary system3, which strengthens spain ’ s credibility in a global context. it ’ s true that the crisis revealed significant institutional shortcomings in the structure of the monetary union, but it ’ s equally true that european countries have taken this on board and carried out substantial reforms. the banking union represents one of the greatest achievements of european integration. banks are now supervised at the european level, which enables risks that transcend national borders to be identified. completing the banking union, in particular by setting up a european deposit insurance scheme, should be a priority for national governments. if we look back 40 years, it ’ s clear that spain today is a more prosperous and modern country. however, we must not forget that much remains to be done. improving the functioning of the labour market is still an outstanding issue – more than 3 million people remain unemployed, and the youth unemployment rate is still above 30 %. but there are grounds for optimism