not unlike the measures of the output gap shown earlier. as illustrated, the wage gap is calculated as the difference between the rise in labour costs in manufacturing in norway and 4. 5 per cent. the wage gap is calculated as the difference between the rise in labour costs in norway and trading partners in the years prior to 2001. there tends to be a correlation between the wage gap and the output gap. the output gap can be an expression of our assessment of pressures in the economy. the wage gap can be a more direct indication of the social partners ’ perception of the situation. this provides useful information in interest rate setting. moreover, wage figures and wage growth estimates in real time are considerably more reliable than preliminary national accounts figures for output and demand that are used to estimate the output gap, which tend to be subject to substantial revision. the wage growth estimates drawn up by norges bank early last summer, just after the income settlements, underestimated the increase by 0. 16 percentage point, with small deviations, on average for the period 1995 - 2001. on the other hand, the wage gap is a lagging indicator. wage growth in any one year has been heavily influenced by economic developments in the preceding 12 - 18 months. when we look at future prospects, a good estimate for the output gap can therefore provide a better indication of the outlook for wage and price inflation. both these simple measures are based on stylised assumptions concerning productivity growth and must therefore be used with caution. wage gap1 ) and output gap per cent output gap wage gap - 1 - 1 - 2 - 2 1 ) up to 2000 : difference between rise in hourly labour costs in manufacturing in norway and among trading partners. thereafter growth in excess of 4. 5 per cent. - 3 - 4 - 3 - 4 sources : statistics norway, trcis / imf and norges bank sg gausdal 31. 01. 03 the high level of wage growth in 2002 implied a tight monetary policy. the interest rate differential against trading partners widened. the krone appreciated further. relationships in the foreign exchange market are unstable, but there are a number of fundamental forces that influence the krone. high oil prices and the phasing in of petroleum revenues into the norwegian economy are part of the explanation, but the predominant factor is probably the cyclical divergence between norway and abroad. krone exchange rate1 ) and 12 - month interest rate differential against trading partners. per cent 4. 0 3. 5 3.

important rationalisation has taken place in the icelandic financial system. until a few years ago, two of the main commercial banks were fully government owned and so were a host of so - called investment credit funds. the funds were unified in a single institution, which was subsequently privatised. the government has also reduced its stake in the commercial banks over the most recent years and intends to have them largely or fully privatised by the end of the current electoral term next year. the privatisation process creates opportunities for continued rationalisation in the financial system creating ample opportunities in the period ahead, including closer ties with foreign financial institutions. it is tempting to put recent economic developments in iceland into the context of developments in some of the other nordic countries about a decade ago. liberalisation of the icelandic financial markets was more or less completed in the mid - 1990s when the last restrictions on the movement of capital between iceland and other countries were removed. our liberalisation came a few years later than in the other nordic countries. you will recall that in some of the other nordic countries, liberalisation was followed by a boom period in the economy, partly or largely fuelled by a rapid growth of credit and in some cases large fiscal deficits. at the same time, these countries were pursuing a fixed exchange rate policy vis - a - vis the ecu. developments in the domestic economies were such that the fixed exchange rate policy was gradually undermined, the rapid credit growth of banks resulted in weakening loan portfolios when asset prices fell, the exchange rate fixety gave way to floating, the currencies depreciated and inflation rose. the current account of the balance of payments also deteriorated. developments in iceland from the latter half of 1990s until the present time resemble in many ways the experience of some of the other nordic countries a decade earlier but differ also in important respects. soon after liberalisation, domestic demand picked up, fuelled by rapidly rising credit in the wake of intensified competition in the financial sector and a sharp increase in credit availability. at that time, iceland was pursuing a fixed exchange rate policy but not as rigidly fixed as the other nordic countries had done a decade earlier. the expansion in the economy at the end of last decade led to a very rapid rise in the current account deficit, climaxing in year 2000. through the effects of a tightening monetary policy, the exchange rate of the krona gradually appreciated. in the spring of the year 2000, expectations in the market shifted for a variety