be prudent. it may be that many households have sensed this. we see at present a certain caution in their behaviour : even though unemployment is low, and measures of confidence have been quite high, consumer spending has seen only modest growth. this may be partly attributable to the fact that the stimulus measures of late 2008 and early 2009 resulted in a bringing forward of spending on durables into that period from the current period ( though purchases of motor vehicles by households – a different kind of durable – have increased strongly over recent months ). but the long downward trend in the saving rate seems to have turned around and i think we are witnessing, at least just now, more caution in borrowing behaviour. of course this will have been affected by the recent increase in interest rates but the level of rates is not actually high by the standards of the past decade or two. we can ’ t rule out something more fundamental at work. we can ’ t know whether this apparent change will turn out to be durable. but if it did persist, and if that meant that we avoided a further significant increase in household leverage in this business cycle, it might be no bad thing. moreover if a period of modest growth in consumer spending helped to make room for the build - up in investment activity that seems likely, perhaps that would be no bad thing either. these sorts of trends would surely increase the medium - term resilience of household finances and accommodate the resource boom and the rise in other forms of investment with less pressure on labour markets and prices than otherwise. the world economy has to date staged a stronger recovery than most thought likely a year ago, albeit one that is uneven across regions. looking ahead, it has to be expected that the unfolding situation in europe, which is going to result in earlier fiscal tightening than had been assumed by forecasters until now, will weigh somewhat on global growth in 2011. but the overall outcome will depend on what else happens and judgements about all that at this stage can only be preliminary. it cannot be denied that the potential for further financial turmoil exists, but to date the stresses have not been of the order of magnitude we saw a year and a half ago. much still hinges, however, on the way european policy makers craft their ongoing response to a complex problem. we in australia must naturally keep a careful watch on all this. it will be just as important, though, to keep a close watch on developments in the asian region. asia will be affected by

shocks, or to news that changes our views on how the economy is evolving. if a change in the outlook is judged to be significant, it may warrant a change in the stance of monetary policy. however, that link between the forecasts and policy is by no means a professor pagan is one of australia ’ s foremost academic economists and served on the board of the reserve bank from 1995 to 2000. dr wilcox is director of the division of research and statistics at the federal reserve board of governors in the united states. i use the term “ forecast ” somewhat loosely, since these are conditioned on a range of assumptions, such as a fixed nominal exchange rate and a particular path for the cash rate, and hence could better be described as “ projections ”. bis central bankers ’ speeches mechanical one. in part, that is because any policy response will depend on the nature of the change to the outlook, including whether it has been driven primarily by supply or demand shocks, and how persistent those shocks are likely to be. also, any policy response will depend on an assessment of the extent to which the economy will adjust of its own accord. it is important to recognise that sufficiently flexible economies can do much to right themselves, with households and businesses responding to the signals provided by changes in prices, wages and the exchange rate. such changes have played a major role in the adjustment of the australian economy to the decline in commodity prices and mining investment over recent years. 3 another important consideration is the sizeable degree of uncertainty about the outlook. while a revision to the central outlook might appear to be of substance, it may still be relatively small compared with the considerable degree of forecast uncertainty. and finally, other considerations, beyond the near - term outlook of the macroeconomy, may be relevant, including the prospects for financial stability. the role of models modelling can play a useful role in the forecasting process, including by helping to identify the nature of the shocks affecting the economy. models can also provide a sense of how the economy might respond to alternative policy paths or different assumptions about key variables, such as commodity prices or the exchange rate to name just two. in addition, models allow us to check whether our forecasts are consistent. for example, does the path for output and employment imply a plausible path for productivity? and do they imply patterns of economic behaviour that are broadly in line with historical experience? a recent instance is the decline in wage growth over recent years, which has been larger than implied by the historical