of U.S. monetary policy. In some cases, these led to full-blown currency or debt crises, particularly in Latin America during the 1980s and the early to mid-1990s, and in Asia during the second half of the 1990s. The reduced frequency of large depreciations and lower unconditional pass-throughs over the past two decades may have common causes: enhanced monetary and fiscal policy frameworks, more flexible exchange rate regimes, accumulations of foreign exchange reserves, lower current account deficits, and better external debt management (Frankel, Parsley, and Wei 2005). Unconditional pass-throughs remained higher among EMDEs with less flexible exchange rate regimes (those devaluing from currency pegs or other forms of currency arrangements) and those without inflation targeting central banks.

Appreciation episodes are generally associated with positive, but lower, pass-throughs compared to depreciations of the same magnitude, with median values of +0.02 for advanced economies and EMDEs for appreciations of between 5 and 10 percent, and only slightly higher for appreciations of between 10 and 20 percent (Figure 2). These results may indicate that currency appreciations induce a weaker response from import and consumer prices compared to similar-size depreciations ‐ ‐ (Brun Aguerre, Fuertes, and Greenwood Nimmo 2017). However, large currency appreciations are also rare events, making rigorous conclusions about asymmetric effects difficult to establish in this context. Overall, the results appear to point to the presence of nonlinearities in the relationship between exchange rate movements and inflation, including in EMDEs (Caselli and Roitman 2016).

# 2.2. Inflation and exchange rate correlation: Evolution over time

Although the declining sensitivity of inflation to exchange rate movements has been extensively documented, this relationship is generally assumed to be stable in the short term. However, there is growing evidence that pass-throughs can vary considerably even over short periods of time, making inference from average values unreliable and potentially misleading for policy evaluation and forecasting purposes.

This instability in pass-through rates can be illustrated by plotting rolling correlation rates between exchange rate movements and consumer price inflation over time (Figure 3).<sup>2</sup> For advanced economies, the median correlation rate became increasingly positive during the late 1990s (+0.4 in 2000), during the mid-2000s (+0.2 in 2007), and again during the mid-2010s (+0.5 in 2014). These were periods marked by unusually large monetary policy shocks or heightened uncertainty over policy actions, providing some evidence of stronger exchange rate pass-through to inflation during such episodes. In contrast, correlation rates were close to zero during the recovery in the early 2000s and turned significantly negative during the global financial crisis (- 0.5 in 2008-09). They were also close to zero during the latest synchronized upturn in 2017-18. These were periods dominated by shifts in domestic or global demand conditions, which appear to be associated with a lower sensitivity of inflation to exchange rate movements.<sup>3</sup> These trends were largely shared across countries, as reflected in similar swings in the upper and lower bands of the interquartile range of country estimates.<sup>4</sup>

> 2 Using a three-year window of the bivariate correlation between the nominal effective exchange rate depreciation rate in one quarter and the inflation rate in the next quarter. For advanced economies and EMDEs, correlation rates tend to peak after one quarter, indicating that exchange rate movements have the strongest impact on inflation with a onequarter lag.

> 3 Sharp movements in oil prices around the global financial crisis also affected the correlation between exchange rate movement and domestic inflation trends around that period.

> 4 Range between the 25th and 75th percentile of country estimates.

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