Hence the title of my remarks this morning: Fundamentals and Flexibility. Some background It is probably helpful to start with some context. This is usefully provided by this first graph, which shows various measures of how Australia’s output and real income have evolved over the past couple of decades or so (Graph 1). The green line shows output per hour worked.
Essentially, Woodford has developed the links between fluctuations of output and inflation around their natural20 or long-run equilibrium values and economic welfare – a point21 made clear by the discussion above of his analysis of the optimal goals of monetary policy.