, raised productivity growth rates and ultimately helped bring about an extraordinary reduction in global inflation and along with it a reduction in output volatility. as i have mentioned earlier, there is no doubt that good central banking itself has made an important contribution. but ultimately central banks have also benefited from the process. with inflation receding, many central banks have been able to focus increasingly on what typically constitutes a subordinate element of their legislative mandate : stabilization of output. in other words, a structural decline in the rate of inflation has increased the margins of manoeuvre for central banks. this does not alter the fact that central banks have no ability to fine - tune the real economy. moreover, an important body of academic literature suggests that monetary policy has also become more effective as markets shed regulatory impediments. 10 monetary policy is therefore not only one of the forces behind the dramatic decline of inflation since the early 1980s. perhaps more importantly, it has been one of the main beneficiaries of the globalization process. this insight has tremendous significance for switzerland where, as i have attempted to show, much of the non - tradable sector of our economy remains tied up in a structural straight jacket. eliminating this straight jacket or at least unbuttoning it would have wide - ranging positive effects on the swiss economy. if our legislative authorities rise to that challenge, they are likely to replicate the competitionboosting effect that the forces of globalization have exerted on the external sector in the domestically oriented sectors of our economy. higher productivity growth rates would ultimately lead to higher growth rates and thus reverse a worrying trend of declining relative growth dynamics in switzerland in comparison with other oecd countries. 11 such productivity driven growth dynamics should lead to lower prices across a sizeable part of our economy. obviously, this statement needs to be qualified. he swiss economy will always remain vulnerable to developments abroad. a significant demand or supply shock to the global economy could reverse the beneficial impact on domestic prices of further domestic liberalization. for example, widespread protectionist measures rolling back the achievements of globalization or widespread geopolitical conflict and uncertainty would certainly threaten the broad achievements with regard to price stability. nonetheless, breaking up the rigidities impeding competition in the domestically oriented sectors of our economy has every chance of rendering monetary policy not only more alan blinder ( 1998 ) : “ central banking in theory and practice ”. cambridge : mit press. for a detailed analysis see aymo brunetti ( 2003 ) : „

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. as we revisit this dramatic moment in monetary history, we need to remember that it occurred against the backdrop of nearly 15 years of disillusion regarding the ability of activist “ keynesian ” economic policies to guarantee low inflation and full employment. from 1965 onwards, inflation had been on the rise and unemployment surged in the 70 ’ s, following the first oil shock. in the beginning of the 80 ’ s, it appeared that fiat money was inherently prone to cause periodic bouts of inflation and that there was little one could do about it. ( see annex for graph 1 ) since 1979, the global monetary environment has evolved dramatically. achieving and maintaining price stability has become the undisputed guiding principle of a vast majority of the world ’ s central banks. price stability ensures the signalling power of prices, thus bolstering the efficiency of the market mechanism. by preserving purchasing power, it facilitates long - term planning and induces long - term investments. price stability also prevents social injustices from emerging between debtors, workers and retirees. finally, price stability minimizes tax related distortions linked to the interaction of inflation and the tax code. 1 see martin feldstein ( 1983 ) : “ inflation, tax rules, and capital formation ”, chicago : university of chicago press. the determined focus of monetary policy on price stability has contributed to anchoring the public ’ s inflation expectations at low levels. the increasing scepticism of the 1960s and the 1970s about monetary policy ’ s ability to fight inflation has given way to confidence that prudent, consistent and forward - looking monetary policy can contain the destructive forces of inflation. global inflation figures suggest that such confidence is largely justified. in the industrialized world, inflation declined from 12 % in 1980 to 1. 4 % in 2002. 2 in the developing world, the decline of inflation has been even more remarkable with yearly rates tumbling from an average of 31 percent in the early 1980s to currently under 6 %. 3 along with a significant decline in inflation, volatility of economic growth has fallen everywhere. both in the u. s. as well as in germany, the