In particular, the real appreciation channel seems to have been operating very slowly, and inflated animal spirits seems to have put in question the existence of the fully rational inter-temporal optimisers taken as given in many models. In addition, the public sector itself may also have been affected by exuberant expectations.
As a result, governments in some countries increased their expenditure and/or reduced taxes, expecting that the gains in output and increased revenues seen during the boom years would be permanent. Consequently, when these countries headed into a downturn, fiscal positions that looked healthy on the surface turned out to be precarious, deficits rose sharply and debt ratios moved along explosive trajectories.