The Long Run: Low probability, high impact scenarios for the Australian economy and financial markets

Uncertainty is a feature of the economic, financial and social environment, and one technique of dealing with this uncertainty is scenario analysis. 

At its core, scenario analysis is applying knowledge and judgements about probabilities and financial impact over a long-term in a business or organisational context that may be low probability but high impact. These are the shocks that cause the greatest disruption and require the greatest adjustments. Understanding the implications and having a gameplan in place are powerful supports for decision makers.

This Green Paper, written by economist Michael Blythe, a former Chief Economist for the Commonwealth Bank and an economist at the Reserve Bank of Australia, collaborated with actuaries Hugh Miller and Doug Isles explore a baseline long-run scenario and three plausible high-impact, low-probability alternative future scenarios, including: 

  • Stagflation (high-inflation and low growth)
  • A major decline in Australian house prices, and 
  • An embrace by policymakers of Modern Monetary Theory. 

Although alternative future scenarios appear bleak and involve a significant recession at some point, optimistic alternative scenarios are plausible. Such scenarios are not, however, covered in this Paper, given the balance of risks is currently to the downside.  

If you want to reflect on the baseline economic and financial market outlook underpinning your professional work, this Green Paper can assist.

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