Assessing the Credibility of a Target Zone: Evidence from EMS Countries.

This paper proposes a Bayesian extension of Svensson's (1991) test of target zone credibility. The credibility measures considered allow us to quantify the target zone's overall credibility at each point in time as well as a measure of long-run credibility. In an application of the new methodology to three European Monetary System (EMS) countries (France, Italy and the UK), using data up to 1993, we find significant anticipatory signals of the September 1992 currency crisis. We also find a strong correlation between various macroeconomic variables and the proposed credibility measure. Copyright @ 2000 by John Wiley & Sons, Ltd. All rights reserved.