only loosely connected local markets. thus, while investors can arbitrage the price of a commodity such as aluminum between portland, maine, and portland, oregon, they cannot do that with home prices because they cannot move the houses. as a consequence, unlike the behavior of commodity prices, which varies little from place to place, the behavior of home prices varies widely across the nation. speculation in homes is largely local, especially for owner - occupied residences. for homeowners to realize accumulated capital gains on a residence - a precondition of a speculative market - they must move. another formidable barrier to the emergence of speculative activity in housing markets is that home sales involve significant commissions and closing costs, which average in the neighborhood of 10 percent of the sales price. where homeowner sales predominate, speculative turnover of homes is difficult. but in recent years, the pace of turnover of existing homes has quickened. it appears that a substantial part of the acceleration in turnover reflects the purchase of second homes - either for investment or vacation purposes. transactions in second homes, of course, are not restrained by the same forces that restrict the purchases or sales of primary residences - an individual can sell without having to move. this suggests that speculative activity may have had a greater role in generating the recent price increases than it has customarily had in the past. the apparent froth in housing markets may have spilled over into mortgage markets. the dramatic increase in the prevalence of interest - only loans, as well as the introduction of other relatively exotic forms of adjustable - rate mortgages, are developments of particular concern. to be sure, these financing vehicles have their appropriate uses. but to the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace. the u. s. economy has weathered such episodes before without experiencing significant declines in the national average level of home prices. in part, this is explained by an underlying uptrend in home prices. because of the degree of customization of homes, it is difficult to achieve significant productivity gains in residential building despite the ongoing technological advances in other areas of our economy. as a result, productivity gains in residential construction have lagged behind the average productivity increases in the united states for many decades. this shortfall has been one of the reasons that house prices have consistently outpaced the general price level for many decades. although we certainly cannot rule out

our country ’ s fundamentals. these episodes lasted for only a limited time, however. another advantage of a flexible swiss franc is that changes in the international monetary system have little bearing on our currency which is largely determined by switzerland ’ s economic realities. consequently, the launch of the euro - a major event on the monetary scene in recent years - did not lead to the disappearance or the destabilisation of the franc as feared by some. though the euro - for all intents and purposes - is accepted as a means of payment in switzerland, there are not more euros in circulation now than there were french francs or german marks prior to the monetary integration. furthermore, the calm that has characterised the foreign exchange market in europe since the disappearance of the national currencies mitigated the speculative pressures on the franc. our currency is therefore less volatile than before. last but not least, contrary to the pessimistic assumption that the swiss national bank would have to shadow the policy of the european central bank, it was able to set its interest rates according to the needs of the swiss economy. on the whole, our monetary regime passed the test imposed by the change in the european monetary system with flying colours. even though switzerland is a modest player on the international scene it carries more weight than one would imagine. the country ’ s edge lies in its small size, leaving it no other option than to open up to international trade. moreover, its liberal philosophy and sound financial standing have given it the necessary tools to conduct a policy of openness and to have a strong presence abroad. having chosen the option of free trade and free movement of capital, switzerland is, in many respects, better prepared than others to take advantage of the greater opening of the borders brought about by globalisation. to be sure, this is not an easy ride, as international competition always necessitates painful adjustments, and switzerland is no exception in this respect. when we take stock of the last few years, however, the bottom line looks favourable. we would certainly be in an even better position now, if we had built up a stronger presence in emerging economies. as you can see, contrary to what some people believe, globalisation is not the cause of the weak growth of the swiss economy ; indeed the opposite is true. foreign trade is the engine driving our economy. it has expanded in recent years in step with the global economy. by contrast, our domestic market has stagnated and registered only