stability for the australian economy overall. we can ’ t know whether this scenario of higher but more variable income growth will come to pass. but if it did, how should we respond? we could simply accept higher variability, if that comes, as the price of higher average income growth. that would see higher variability in demand in the economy, which would have its own implications, not least that it could make it harder for macroeconomic policies to foster stability. another approach would be to reflect the higher income variability in our saving and portfolio behaviour rather than our spending behaviour. we could seek to smooth our consumption – responding less to rises or falls in income with changes in spending and allowing the effects to be reflected in fluctuations in saving. in the most ambitious version of this approach, we could seek to hold those savings in assets that provided some sort of natural hedge against the variability of trading partners, or whose returns were at least were uncorrelated with them. of course, such assets might be hard to find – the international choice of quality assets with reasonable returns these days is a good deal more limited than it used to be. it is possible that this behaviour might be managed through the decisions of private savers. there might also be a case for some of it occurring through the public finances. that would mean accepting considerably larger cyclical variation in the budget position, and especially considerably larger surpluses in the upswings of future cycles, than those to which we have been accustomed in the past. there would also be issues of governance and management of any net asset positions accumulated by the government as part of such an approach, including whether it should be, as some have suggested, in a stabilisation fund of some sort. these are pretty big questions and addressing them would not be straightforward, so i am not going to attempt that tonight. the point simply is that, in the face of what appears to be a very big event in our terms of trade, these issues are deserving of consideration – perhaps by ceda, among others, as you enter your sixth decade. conclusion as i said at the outset, we have grounds for confidence in the future of our country, just as at ceda ’ s beginning 50 years ago. recent performance, not to mention the economic opportunities in our time zone, has helped to strengthen our confidence. but it would be a mistake to rest on recent achievements, as significant as they have been, and to fail to press on in our efforts to do better.

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