Experience over recent years has shown that, in these circumstances, governments often make mistakes in designing economic policies, dramatically hike taxes and reduce public  BIS central bankers’ speeches  5  investment, without significantly reducing current spending, and postpone the structural reforms that require social consensus.
We had ample evidence of this in the 1970s and 1980s. A tightening will affect economic growth in the short term, but does monetary policy also have an effect on long term growth? We have done some research on this at the Reserve Bank. A recent Bulletin article (Smith 2004) examined both theoretical and empirical studies on this issue.