In a high-multiplier environment, this equilibrium could be self-reinforcing since the associated deterioration in the macro-financial environment could indeed validate an increase in sovereign risk premia. By contrast, the positive macro-financial impact of a vigorous fiscal response can reconcile the twin phenomena of an increase in fiscal deficits and a decline in sovereign yields.
It therefore remains vital for fiscal and monetary policymakers to guard against the risks of these financial amplification channels.