Standard models of policy credibility, defined as the expectation that
an announced policy will be carried out, emphasize the preferences of
the policymaker and the role of tough policies in signaling toughness
and raising credibility. Whether a policy is carried out, however, wi
ll also reflect the state of the economy- We present a model in which
a policymaker maintains a fixed parity in good times, but devalues if
the unemployment rate gets too high. Our main conclusion is that if th
ere is persistence in unemployment, observing a tough policy in a give
n period may lower rather than raise the credibility of a no-devaluati
on pledge in subsequent periods. We test this implication on EMS inter
est rates and find support for our hypothesis.