Hence the capacity to use fiscal policy counter-cyclically is key, which means that governments must have access to some form of asset that acts as a safe haven in crisis times. Otherwise, debt-financed fiscal policy will in fact be destabilising, since it will depress sovereign bond prices and trigger ratings downgrades, feeding back into the financial system through the channels I already described.
A good example is the taper tantrum in 2013, in which a change in market perceptions triggered financial market turmoil, out of line with the modest policy tightening envisaged in the Fed’s cautious public statements. Third, such guidance can distort markets as the prolonged period of “r-g” less than zero could lead to fiscal irresponsibility.