Macfarlane moved to Melbourne at the age of three and lived there until he was twenty three. He was educated at Melbourne High School and Monash University, Melbourne, from which he received the Bachelor of Economics degree with honours in 1968, and the Master of Economics degree in 1971.^[1] While completing his master's degree he taught at Monash University. He moved to Sydney in 1970 on a short-term contract with the Reserve Bank of Australia to join a team building the first econometric model of the Australian economy. When his contract finished, he moved to England and from 1971–72 he worked at the Institute of Economics and Statistics at the University of Oxford. Following this, he then moved to the Organisation for Economic Co-operation and Development (OECD) in Paris, where he served until 1978.

Macfarlane returned to Australia and became a permanent employee of the Reserve Bank's Research Department in 1979. In 1981 he was made its deputy manager. In 1983, six months before the float of the Australian dollar, he moved to the Financial Markets Department where his work involved close interaction with the money, bond and foreign exchange markets. In 1988 he returned to head the Economics Department to a position now known as Assistant Governor (Economic).

In 1992 he was appointed Deputy Governor by the Keating government, and in 1996, he was appointed Governor by the Howard government.^[2] On taking up the position, he signed a memorandum of Agreement with Treasurer Peter Costello which introduced Australia's inflation-targeting monetary policy regime.^[3] The ten years during which Macfarlane was Governor was a period of good economic growth and low inflation, although the Asian financial crisis in 1997, the global recession of 2001 and an incipient housing price bubble in 2003 presented challenges.^[4] On Macfarlane's retirement in 2006, Treasurer Peter Costello, said: "Ian Macfarlane has been an exceptionally successful governor of the Reserve Bank ... and when history of the last ten years is written, it will show as one of, if not the greatest periods of economic management in Australian history."^[5] Prime Minister John Howard wrote in his autobiography "Macfarlane was the stand-out economic official in the lifetime of my government. His advice and sense of balance was far superior to that of anybody else who provided economic advice to us".^[6]

After retiring from the RBA^[7] Macfarlane was appointed as a director of three public companies - Woolworths (2007-2015), Leighton Holdings (2007-2013) and ANZ Bank (2007-2016). He was also on the International Advisory Boards of Goldman Sachs (2007-2016) and the China Banking Regulatory Commission (2011-2014). He continued to be a director of the Lowy Institute for International Policy (2004-2017).

Immediately after leaving the RBA, he was chosen to deliver the Boyer Lectures for 2006.^[8] This series of six lectures, which combines both history and economics, was published as a book titled The Search for Stability^[9].

Macfarlane has always been interested in history, and in 2019 published a purely historical work titled Ten Remarkable Australians: they made their mark on the world but were forgotten.^[10] This is a series of biographical essays on ten Australians born before Federation who achieved international prominence in the first half of the 1900s.^[11][12]

Macfarlane married Barbara Heather Payne in 1970. They have two children, a son Duncan and daughter Victoria and six grandchildren, Andrew, Abby, Oscar, Alice, James and Olivia.

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