considerably more than among our trading partners in the same period. however, the business sector is still feeling the effects of the loss in competitiveness that resulted from high wage increases. the exposed sector has been scaled back. companies that are still in operation may be in a better position to cope with the high wage level. a more effective service sector may also have strengthened the export industry. nevertheless, costs may limit activity and employment. the international division of labour is shifting, and when faced with major changes it is a disadvantage for norwegian business and industry that costs are high. credit growth total credit is expanding broadly in line with growth in nominal gdp. however, the composition of credit growth has been giving mixed signals in terms of interest - rate setting over the past year. household debt accumulation is high, while it is low in the enterprise sector. household debt has increased sharply since 1994. the rise in the value of dwellings is one of the main factors behind growth in household debt. house prices have risen by an average of around 9 per cent over the past 10 years. high and persistent house price inflation may contribute to holding up credit growth even after prices have levelled off. since only a portion of the housing stock is sold each year, there will for a long period be some dwellings that are sold at a higher price than when they were last sold. this contributes to sustaining credit growth at a high level. this probably reflects a structural adjustment to the deregulation of the housing and credit markets in the 1980s, after many households suffered financial distress in the wake of the relaxation. homeowners with dwellings that have risen in value now have greater scope for taking up new mortgage - secured loans, using mortgage - equity withdrawal to finance consumption and other investments. a persistently high rate of increase in house prices can in isolation engender expectations of a further rise and can thus prove to be self - reinforcing for a period and push up credit demand. at the same time, the switch to a flexible inflation targeting regime reduces the possibility of exposing households to a double shock in the form of higher unemployment and higher interest rates, as was the case prior to the banking crisis in the beginning of the 1990s. if the economy is exposed to disturbances that may lead to higher unemployment, inflation will normally decline and interest rates will be lowered. high debt growth increases the vulnerability of households to economic disturbances. as a result of low interest rates, the household interest burden will remain fairly low in spite of high debt growth.

and thus the output gap, we also look at alternative indicators of pressures in the economy. the wage gap measures the difference between actual wage growth and the growth that over time is consistent with the inflation target, and is an indicator of labour market tightness. with an estimate of 2 per cent productivity growth, wage growth of 4. 5 per cent over time will be consistent with an inflation target of 2. 5 per cent. in the chart, the wage gap up to 2000, i. e. before the introduction of the inflation target, is defined as the difference between wage growth in norway and in other countries. as we see from the chart, there appears to be a close relationship between this wage gap and the output gap as it is measured by norges bank. if we look at developments in employment in relation to trend growth ( measured as a percent of the population in employable age groups ), we get a similar path. norges bank has chosen, in keeping with ordinary practice, to use a smoothing parameter,? = 100 in the annual data. we also consider credit growth to be an indicator of public demand. growth in credit which over time deviates from growth in nominal gdp may indicate that the level of activity in the economy is higher or lower than normal. in addition, we monitor various cyclical indicators and acquire information from our regional network. 6 there is uncertainty associated with the estimation of both trend growth and the output gap, but the correspondence that seems to exist between the different methods of indicating pressures in the economy makes us confidant that the output gap, as we calculate it, provides useful information. the output gap provides an overview of the overall pressures in the real economy. if there are no substantial economic disturbances - or shocks - there will be no conflict between stabilising inflation and stabilising output and employment. a positive output gap will over time result in inflation that is above target, while a negative output gap will result in inflation that is too low. nor will demand shocks in a closed economy result in a conflict in the short term between price stability and stability in the real economy. a positive demand shock will result in higher inflation, and an appropriate monetary policy response would be to increase the interest rate as much as is necessary for output to return rapidly to its potential level. in an open economy, however, a conflict of objectives could arise in the short term following a demand shock. although a higher interest rate would contribute to stabilising both output and inflation