Fiscal policy, debt management and exchange rate credibility: Lessons from the recent Italian experience

This paper explores some potential determinants of exchange rate credibility with reference to the Italian experience of the 1990s, The analysis relies on a nonlinear framework emphasizing shifts between credible and non-credible states, and assuming a significant degree of persistence in the above regimes. Almost all fiscal and debt management indicators display significant effects on devaluation expectations. The main policy implications of the paper are that a restrictive fiscal stance, a lengthening of average debt maturity and an increase in the share of foreign-denominated debt are crucial to stabilize the Lira exchange rate and to qualify Italy in the former group of countries which will join EMU. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: E62; E65; F31.