. the surge in home prices was fueled by products and practices in the financial sector that led to a rapid and unsustainable buildup of leverage and an underpricing of risk during this period. these dynamics in turn provided the fuel that caused house prices and consumer spending to rise much faster than income. as shown in chart 4, the share of gdp accounted for by consumption and residential investment climbed to a peak of 76 percent in 2005 from 71 percent in the mid - 1990s. the boom, of course, was unsustainable. the progressive easing of underwriting standards that was needed to support housing demand could only persist as long as housing prices were rising rapidly. but for home prices to rise rapidly, underwriting standards had to be progressively relaxed in order to generate more buyers. when home prices began to slip beginning in 2006, the dynamic swung into reverse. the collateral values supporting borrowing and spending began to fall. as banks ’ and other financial intermediaries ’ credit losses began to mount, credit availability became impaired and this exacerbated the downward pressure on home prices and on borrowing and spending. not only did households that had overextended themselves have to cut back ; others also retrenched because they were also affected by declines in wealth and heightened uncertainty about the economic outlook and their job prospects. it is not surprising that the workout from the excesses of this type of boom would take a long time. just as it took several years for the boom to begin and run its course, so it would take years, not months, for households and financial intermediaries to adjust their balance sheets and behavior to the new environment. households had to raise their saving rates in order to rebuild their balance sheets. financial intermediaries had to replenish their capital to replace losses via loan charge - offs and other credit impairments. both adjustments would need to occur before the economy could grow rapidly. with this in mind, the key questions are : 1 ) where are we in the adjustment process, and 2 ) what, if anything, can monetary policy do to facilitate a smoother adjustment and more rapid progress toward our dual mandate objectives? in terms of the adjustment process, starting on the household side, most signs point to significant progress. for example, the revisions to the national income and product accounts announced in july revealed substantial upward revisions to the personal saving rate ( chart 5 ). the current saving rate is broadly consistent with the historical relationship between personal saving and the household net worth

europe. most probably, what matters for estonians is that while being part of europe we still wish to retain something our own. this is not the most convenient situation for eesti pank. on one hand, we should be proud of the trust we have earned at home. on the other hand, we know that joining the euro area is beneficial and necessary for the whole country. not only because of the obligation arising from the treaty of the european union. rather because euro area membership provides ultimate monetary and economic security for our nation that is already used to the “ de facto membership ”. competitiveness in today ’ s world ladies and gentlemen let me now turn to the topic of today ’ s conference : competitiveness in today ’ s world. i would like to look at it from the perspective of a really small country. as we all know, globalization has changed the understanding of success factors for countries. oldstyle economic policies and market protection are of no use any more, since today whole factories and industries are moved within a short time. how can a small country survive in this world at all? it is often said that real wages should be kept artificially low to attract investment and provide high returns on capital. i do not think this is the right way for a small country. we could never compete with major economies when it comes to mass production. instead, we should make use of the fact that globalization creates also a huge spectrum of niche markets. mass production cannot meet countless individual needs, as people all over the world demand more and more personalised products and services. this is the key to success for smaller economies. the point of departure for a society to remain competitive is to get over the fear of globalization. the new world is after all an opportunity, not a cause for sorrow. every small country should be able to seize the opportunity if policymakers get a few fundamental things right. i am now going to name four of these fundamentals. four cornerstones of competitiveness the first, if not the most important, cornerstone of competitiveness is society ’ s openness to new ideas, its willingness to communicate and ability to adapt. of all factors that support economic growth, openness is universally considered the most important. openness to ideas allows better understand and make use of the global marketplace. policy - makers can do a lot to promote openness. efficient telecom infrastructure and internet penetration serves as one way to do it. market liberalization and competition are the keywords here. another equally