In particular, doubts about the soundness of fiscal policy can influence the effectiveness of monetary policy instruments and undermine the credibility of monetary policy. For decades – and until very recently – fiscal policies have followed a trend of ever-growing public sector and government debt levels.
In EMU, without binding fiscal rules, countries might have even 3  BIS Review 75/1999  less incentive to pursue prudent fiscal policies. The main reason is that risk premia offsetting inflation and exchange rate expectations disappear on a country-specific basis and may not be fully outweighed by default risk premia.