by relatively good performance in other sectors. that said, the current episode demonstrates that pronounced housing cycles are not a thing of the past. my discussion so far has focused primarily on the role of variations in housing finance and residential construction in monetary transmission. but, of course, housing may have indirect effects on economic activity, most notably by influencing consumer spending. with regard to household consumption, perhaps the most significant effect of recent developments in mortgage finance is that home equity, which was once a highly illiquid asset, has become instead quite liquid, the result of the development of home equity lines of credit and the relatively low cost of cash - out refinancing. economic theory suggests that the greater liquidity of home equity should allow households to better smooth consumption over time. this smoothing in turn should reduce the dependence of their spending on current income, which, by limiting the power of conventional multiplier effects, should tend to increase macroeconomic stability and reduce the effects of a given change in the short - term interest rate. these inferences are supported by some empirical evidence. 10 on the other hand, the increased liquidity of home equity may lead consumer spending to respond more than in past years to changes in the values of their homes ; some evidence does suggest that the correlation of consumption and house prices is higher in countries, like the united states, that have more sophisticated mortgage markets ( calza, monacelli, and stracca, 2007 ). whether the development of home equity loans and easier mortgage refinancing has increased the magnitude of the real estate wealth effect – and if so, by how much – is a much - debated question that i will leave to another occasion. the united states and now account for about 40 percent of the market, most adjustable - rate mortgages here are actually hybrids in that they bear a fixed rate for the first several years of the loan. for example, mccarthy and peach ( 2002 ) report a substantial decline in the short - run, though not long - run, interest elasticity of residential investment and real gdp after the early 1980s. work by dynan, elmendorf, and sichel ( 2006 ) supports this conclusion as does other work at the federal reserve on models for forecasting residential investment. modeling work at the fed also shows that the short - run sensitivity of residential investment to nominal mortgage rates fell by more than half after the end of the new deal system, but, in line with the findings of mccarthy and peach, remained

the most recent figures are approaching 3 per cent annual growth, which is back to pre - crisis levels. if i am right, the us economy is due for another period of better bis central bankers ’ speeches productivity growth, and i have every reason to think that canada will follow once we work through our adjustment to lower resource prices. a reversal of the cyclical slowdown in investment i mentioned earlier would also serve to support future productivity growth. a second reason for optimism about productivity is that even if most major economies have exploited most available opportunities for integration, gains may still be had from improvements to existing supply chains. economies evolve over time, and comparative advantages are not set in stone. consider china, which for years was the main destination for outsourced production. today, its working - age population is shrinking. unit labour costs have been rising quickly as the economy moves up the value chain. now, we ’ re seeing signs that labour - intensive production is shifting out of china and into nearby economies, such as cambodia and vietnam. all of this suggests that companies and investors may be able to find ways to improve the efficiency of supply chains in many geographic areas. this will show up as a new wave of integration and global trade growth. for policy - makers, of course, this means we should be working to help initiatives such as the trans - pacific partnership and the comprehensive economic and trade agreement between canada and the european union become a reality. third, nobody can predict the future disruptive technologies that would allow the global economy to take its next giant step forward. history gives us no reason to be pessimistic with respect to future technological progress. before i wrap up, let me make one more point. international trade, as measured by our standard global trade statistics, is not the only way for companies to exploit integration opportunities. some companies find it more sensible to operate foreign affiliates in other countries while managing them from home. for some firms, this model effectively acts as a substitute for international trade. and this business model has been growing, even while traditional exports and imports have been slowing. we know that sales by canadian - owned foreign affiliates now exceed total exports from canada, approaching 30 per cent of gdp. in other words, these foreign affiliates are almost like another canadian economy out there, supporting jobs in canada in areas such as research and development, engineering, design and marketing, not to mention lawyers, accountants, and executives who manage the operation from home. in the united states, foreign affiliates are