Alternative Approaches to Evaluate Exchange Rate Credibility: A Selective Survey of the Literature and Some Policy Implications for the European Monetary

This paper provides a selective survey of some recent literature assessing exchange rate credibility through bayesian or nonhinear econometrjc frameworks. The empirical evidence from this literature suggests two main conclusions: one in retrospect, concerning the past experience of France in the EMS, and one in prospect, with reference to some policy implications for the future of EMU. As regards the former aspect, the paper stresses that, differently from a widespread view in the EMS literature, speculative attacks against the French Franc in 1992-93 can be explained, to a large extent, by imbalances in macroeconomic fundamentals. Turning to the latter conclusion, it is argued that, quite independently of negative spili-over effects induced by profligate fiscal policies, a reversal in the recent trend of the French debt/GDP ratio will be important, in the years ahead, to enhance EMU credibility and long run viability.