Imperfect Credibility in a Target Zone. A New Approach and Some Evidence from Euro¬pean Countries

An extension of Svensson (1991) simplest test of target zone credibility inside a Bayesian framework is proposed. The associated credibility measures allow to quantify both the degree of overall short run credibility of a target zone at each point in time, and its long run sustainability. An application of this new test to three European countries (France, Italy, United Kingdom) along the more recent period, reveals a remarkable temporal correspondence with various factors affecting bands credibility. Moreover, significant anticipatory signals of the September 1992 currency crisis are documented.