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.
11  For a detailed analysis see Aymo Brunetti (2003): „Hat die Schweiz ein langfristiges Wachstumsproblem?” Neue Zürcher Zeitung, 31.5./1.6.2003, p.29. 4  BIS Review 44/2003  effective but also more flexible in its ability to focus its efforts beyond the primary mandate of maintaining price stability. 6. Economic and Monetary Policy Outlook  Let me now turn to a brief assessment of current economic conditions in the United States as well as here in Switzerland and conclude with a few comments regarding the outlook for Swiss monetary policy. Recent U.S. economic data confirms that GDP growth has accelerated rapidly in the second half of 2003. Third quarter U.S. GDP growth will be close to 6%. For the fourth quarter, most market participants expect GDP growth to slow to a still robust 4%. This would imply a U.S. growth rate of approximately 3.5% for 2003. Substantial monetary and fiscal stimulus as well as strengthening financial conditions has supported the growth dynamic in the second half of 2003 in the United States. Expectations of moderating growth going forward are linked to the fact that stimulus from fiscal policy is set to shrink. The contribution to consumer spending from this year’s tax cuts is set to decline gradually during 2004. In addition, further substantial increases in the defence budget are unlikely in the coming year, thus dampening the relative contribution to GDP from defence spending during 2004.