While the export sector has continuously managed to achieve high productivity growth rates, productivity has lagged behind dramatically in the domestic sector of the economy. Since the domestic sector continues to represent the bulk of the Swiss economy (approximately 60% of GDP), the poor performance of the domestically oriented sectors undermines the growth potential of the Swiss economy.9 In light of the rapidly deteriorating  7  There are numerous useful definitions of globalization. Here I make reference to the one used by Ngaire Woods, ed. (2000): “The Political Economy of Globalization”, New York: St. Martin’s Press. 8  As a percentage of GDP, Switzerland’s current account surplus is exceeded only by that of Singapore. Switzerland holds net foreign assets of about 135% of GDP which is unmatched in the world. The biggest part of the Swiss current account surplus is therefore derived from the interest earned on these assets (36 billion CHF vs. a surplus of 25 billion CHF from services and a 4.5 billion surplus from trade in 2002). 9  GDP growth in Switzerland is underestimated by the official statistics because these do not fully take into account the improvement of the terms of trade that are regularly realised by the tradable sector (see Ulrich Kohli (2002): “Veränderungen der Terms of Trade und reales BIP” (Terms-of-Trade Changes and Real GDP: Evidence from Switzerland (with English summary), Schweizerische Nationalbank Quartalsheft, June, pp. 54-63.
I will explore how the dramatic increase in international competition during the last twenty years has affected price levels. I will then return closer to home and attempt to illustrate how important segments of the Swiss economy have remained sheltered from international competition through a web of regulatory hurdles. I will make the case that freeing up these sectors would not only raise economic growth – something that is urgently needed in the effort to alleviate the growing stress on our social programs – but also render monetary policy more effective and provide it with more flexibility to focus not only on maintaining price stability but also on output stabilization. Finally, I will conclude with a brief economic and monetary policy outlook for the United States and Switzerland. 1. Great Inflation to Great Moderation  In the United States, the modern era of central banking began on October 6, 1979 when the Federal Reserve, under the leadership of its newly appointed Chairman Paul Volcker announced its adoption of monetary targets. Headline CPI inflation peaked at 15% at the beginning of 1980. Chairman Volcker slowed the growth of money dramatically. Interest rates rose sharply with the banks’ prime interest rate exceeding 20%. The U.S. economy fell into a deep recession. Inflation began to recede steadily. Remarkably, despite the vigorous recovery that followed after 1983, inflation remained relatively subdued at 4%. It reached a temporary floor of 2.5% by mid-1992.