Introduction We have for the past five years or so lived in “interesting times”. The shocks to which the economy has been subject have had larger magnitudes than had been the case during “the great moderation”. The world economy, our terms of trade and the international availability of credit have been a good deal more variable since 2007.
For example, the variability of world GDP has roughly doubled – compared with that in the decade or so prior to 2007 – while the volatility of Australia’s terms of trade has, on some metrics, quadrupled. In response, our interest rates and exchange rate have also been more variable.