Assessing the Credibility of Economic Policy: A Bayesian Approach Applied to France (1988-1993)

The theoretical framework developed in Baxter (1985) is adapted to test the credibility of French economic policy since the last EMS realignment. In line with findings from the target zone literature, a significant increase in credibility is documented for the 1988-1991 period; however, unlike the above literature, signifi¬cant credibility decreases are detected both before and during the recent EMS crisis. The final section of the paper extends Baxter’s testing strategy, and applies a Bayesian unit root test to French real public debt.