It is also not easy to identify a simple relationship between high budget deficits and the level of interest rates, not least because economic agents’ expectations, including expectations about the future course of fiscal policy, play a crucial linking role.
That said, both theory and evidence teach us that over longer periods of time, and “other things being equal”, imprudent fiscal policies and a stability-oriented monetary policy will become incompatible and will eventually clash. Such a constellation of policies - given the commitment of monetary policy to price stability - will have adverse effects on growth. 3.