uncertain krone positions are perceived to be and the size of the risk premium required for these positions. the bank ’ s analyses3 indicate that the krone exchange rate is also affected in the short term by uncertainty in the global economy and international financial unrest. volatility in international foreign exchange markets may explain short - term fluctuations in the krone exchange rate, particularly since 1997. this may be because international operators are more aware of the norwegian krone as a speculative object. the direct relationship between the interest rate and the exchange rate is therefore not stable, and the exchange rate level in itself provides limited information for the setting of interest rates. it is essential to take into account that the norwegian economy is small and very open. norway ’ s foreign trade is substantial. all capital controls have been removed. our financial market is becoming increasingly integrated into the international economy. significant structural changes took place during the 1990s. household savings are now to a large extent invested abroad through life insurance companies and funds. changes in capital flows have a greater impact on exchange rate movements than payments for exports and imports. capital flows can easily be influenced by events in other see mussa ( 2000 ) and stiglitz ( 2000 ) for two opposite views on this question. see bernhardsen and røisland ( 2000 ). countries and by changes in expectations concerning developments in the norwegian business sector, norwegian prices, costs and interest rates. in the long term, a country ’ s exchange rate tends to move in line with developments in domestic price and cost inflation compared with other countries. this is the hypothesis of purchasing power parity between countries. if the level of prices in one country rises at a faster pace than in other countries, that country ’ s currency will tend to depreciate to the same extent over time. empirical evidence has been found for these effects for a number of countries even though the effects are relatively weak in the short term. however, substantial medium - term convergence in purchasing power parity has been found between norway and its trading partners. 4 i have described a foreign exchange market with a market - determined krone exchange rate. normally, we cannot influence price formation in this market through direct interventions. in other words, we have a floating currency not only formally but also in reality. the formal regulation ( from 1994 ) and its interpretation reflect the limitations of monetary policy as a result of developments in foreign exchange markets and the structure of the norwegian economy. price and cost inflation is influenced by monetary policy through a

despite its dependence on raw materials and relatively large exports to russia, was less adversely affected than the other nordic countries. for norway, success in maintaining a stable exchange rate could become more challenging in the new environment. – 3 – use of the euro in norway. euro and the norwegian banking industry use of the euro in norway i would now like to comment on how, and to what extent, norwegian economic agents might be expected to use the euro in the future. there are many indications that the euro will be used more extensively in trade between norway and euro countries than the currencies of the 11 member states combined today. over time the euro will most likely be used on an even wider scale. obviously, the euro would increase in importance in the norwegian market should sweden, denmark and the uk join emu. the euro may also play a role – though probably limited – as a settlement currency between residents. this will primarily be of relevance for import and export enterprises as well as subcontractors in industries that are heavily exposed to the euro area. however, several factors point to the continued use of norwegian kroner among enterprises and households. government payments such as pensions, social security and taxes will continue to be in norwegian kroner, as, most probably, will wages. furthermore, norwegian residents are not permitted to settle outstanding claims in foreign currency in cash, according to norwegian foreign exchange regulations. regulatory issues norway is under no obligation to incorporate eu legislation pertaining to the introduction of the euro into norwegian law. however, there has been some discussion as to whether it would be appropriate to implement some changes in the regulatory framework. one issue has been whether there is a need for statutory amendments to assure the continuity of contracts in which the parties ’ payment obligations are expressed in ecus or in one of the participating countries ’ currencies. norwegian law is considered to be clear on this issue, however, and in the view of the ministry of finance there was no need for legislative changes. in its deliberations on the revised national budget last spring, the storting ( norwegian parliament ) took note of this. another issue is the possibility of keeping accounts in currencies other than the norwegian krone. the new accounting act, which entered into force on 1 january 1999, provides for the registration of accounting information in swedish, danish, english or norwegian. annual company accounts, however, are to be recorded in norwegian kroner and in the norwegian language unless otherwise provided for by regulation