To address similar circumstances, EME policy-makers have used a variety of measures, including restricting capital flows and intervening in foreign exchange markets. These policies have gained increased acceptance, and there are circumstances in which they are justified and can be effective in managing shortrun pressures.
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.