While the use of higher debt at lower rates can be justified on the part of both firms and governments as a way to take advantage of an opportunity, the danger is of a significant deterioration of external conditions, for example, because of a sudden change in market sentiment. This could generate difficulties for debt service and could cause financial disruptions.
8 These risks are more complicated for emerging economies in the present general context of declining output growth and rising inflation. Policy trade-offs would be particularly tough in the case of reversed capital flows. See graph 7. Outlook and challenges Let’s now turn to the possible implications for the future. Monetary policy in advanced countries is at a crossroads.