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, the correlation between consumer price inflation and exchange rate changes is now very low in most industrial countries. so, how does one explain these results? in a previous speech ( mishkin, 2007 ), i observed that many of the basic facts of the recent behavior of inflation dynamics – less persistence of inflation, a flatter phillips curve, less responsiveness of inflation to shocks to energy prices and the exchange rate – can all be explained by recognizing that, in recent years, expectations of inflation have become much more solidly anchored. traditional monetary theorists were correct in emphasizing that exchange rate depreciation and inflation were likely to be closely linked under an unstable monetary policy environment without a nominal anchor. but in the context of a stable and predictable monetary policy environment, nominal shocks play a vastly reduced role in driving fluctuations in consumer prices and the exchange rate, so that there is no reason a priori to expect much association between these variables. thus, a stable monetary policy – supported by an institutional framework that allows the central bank to pursue a policy independent of fiscal considerations and political pressures – effectively removes an important potential source of high pass - through of exchange rate changes to consumer prices. moreover, with expectations of inflation anchored, real shocks arising from various channels – whether from aggregate demand, energy prices, or the foreign exchange rate – will also have a smaller effect on expected inflation and hence on trend inflation. the presence of a strong commitment to a nominal anchor in many countries – that is, the use of monetary policy actions and statements to maintain low and stable inflation – helps explain why even sizeable depreciations of the nominal exchange rate have exerted small effects on consumer prices in many recent historical episodes and can be expected usually to exert small effects in future episodes. john taylor ( 2002 ) made this exact point in a well - known paper where he argued that the establishment of a strong nominal anchor in many countries in recent years has led to the very low pass - through of exchange rate depreciation to inflation that we find in the data. of course, an important corollary is that low exchange rate pass - through will persist only so long as the monetary authorities continue to ratify the public's expectations that they will continue to respond aggressively to shocks that have potentially persistent adverse effects on inflation. an important caveat to the conclusion that exchange rate pass - through to consumer price inflation is now very low is that the empirical evidence on which it rests is mainly unconditional in nature. in other