While partly reflecting improved economic prospects, a sustained rise in market rates could translate into a tightening of wider financing conditions that are relevant for the entire economy. Such a tightening would be premature and would pose a risk to the ongoing economic recovery and the outlook for inflation.
This shock would raise the trend path of income, meaning that slightly higher primary budget and trade deficits could still be consistent with debt-to-GDP stability; in effect, a higher level of g can be plugged into equation 2 (at least as long as it is not offset by a higher i).