needed to stabilize inflation and output. This may lead to unnecessary fluctuations in activity and make the anchoring of inflation expectations more difficult to achieve over time.

Against this background, this paper examines the following questions. First, how have exchange rate movements impacted inflation over time? Second, how does the pass-through to inflation depend on the underlying shock triggering the exchange rate movement? Third, what country characteristics are associated with lower pass-throughs?

To answer these questions, the paper first examines the extent of the comovement between inflation and exchange rates across 34 advanced economies and 138 EMDEs, including event studies of significant depreciation and appreciation episodes. Second, from a series of factoraugmented vector autoregression (FAVAR) models, the paper estimates the impact of various global and domestic shocks on exchange rates and inflation, deriving shock-specific pass-through ratios.<sup>1</sup> The models are estimated from a subsample of 55 countries, including 26 EMDEs. Third, it investigates how country characteristics affect pass-through ratios, paying particular attention to monetary policy frameworks, participation in GVCs, and foreign-currency invoicing.

The main conclusions are as follows. Large depreciation episodes continue to be associated, on average, with more significant increases in consumer price inflation in EMDEs than in advanced economies. Unconditional pass-throughs tend to increase with the size of the depreciation in both country groups. In addition, the relationship between inflation and currency movements depends on the nature of the underlying shock. Monetary policy shocks are associated with a higher exchange rate pass-through compared to other domestic shocks, and global shocks have widely different effects. Finally, country characteristics matter for pass-through rates. Pass-throughs are generally lower in countries with more flexible exchange rate regimes and a credible commitment to an inflation target. This, in turn, facilitates the central bank’s task of stabilizing inflation and makes exchange rate movements a more effective buffer against external shocks.

The contribution of this paper to the literature is threefold. First, it utilizes a rich set of results to shed new light on the heterogeneity of pass-through estimates across countries and over time.

Second, this paper supplements a burgeoning empirical literature linking exchange rate passthrough to underlying shocks in a structural vector autoregression (SVAR) model framework. This contrasts with traditional reduced-form approaches that estimate “average” pass-throughs based on conditioning variables. The estimation of shock-specific pass-throughs refines the analysis of factors affecting the link between exchange rate movements and inflation.

Third, compared to the few preceding studies that have derived state-dependent estimates of ERPTRs (Forbes, Hjortsoe, and Nenova 2017, 2018; Shambaugh 2008), this paper investigates additional shocks and uses a larger sample of countries. It looks at the impact of three domestic shocks (monetary policy, demand, and supply), three global shocks (demand, supply, and oil price), and a residual shock capturing, among other factors, changing risk premiums. A unique FAVAR framework combining global and domestic developments allows identification of these different shocks in a unified setup. Moreover, the identification strategy uses an efficient algorithm to combine sign and zero restrictions, preserving a certain level of agnosticism (Arias, Rubio-

> 1 Defined as the ratio between the one-year cumulative impulse response of consumer price inflation and the one-year cumulative impulse response of the exchange rate change to three domestic shocks (monetary policy, domestic demand, and domestic supply), three global shocks (global demand, global supply, and oil prices), and one residual shock (risk premium).

3