The article explores how changes in government debt levels affect the impact of monetary policy on inflation and output. The type of monetary policy rule used by the central bank is crucial. When targeting the risky rate, a temporary monetary contraction can lead to sustained inflation increases near the fiscal limit. However, targeting the risk-free rate can keep inflation in check but result in prolonged output contractions. This research highlights the tradeoff between stabilizing inflation and output when sovereign default risk is a factor.