Global disinflation weakens domestic inflation channels in small open economies.
Global disinflation can drag down inflation in small open economies by changing how domestic and foreign factors influence prices. Researchers used a state-dependent Phillips curve to show that when world inflation decreases, domestic inflation is less affected by local shocks. This means that lower global inflation weakens the connection between domestic goods and foreign prices, impacting domestic inflation rates. Empirical evidence from various countries supports this finding.