The Inflation Definition And Influences - 1646 Words

1.1 The inflation definition and influences Inflation is general defined as the devaluation of the currency with the comprehensive and continued rising price level, which means the purchase of money is persistent declining (James and Charles 1975). And this is generally considered as the result of the amount of money in circulation more than the actual needs of the economy. It will directly leads to the devaluation of paper money. If the income of residents do not change, then the living standard of citizens will dropped, which might result in the social and economic disorder and can negatively impact the development of the economy. However, within a certain period of time, moderate inflation can stimulate consumption, expand domestic†¦show more content†¦1.2 The main properties of New Keynesian Phillips Curve Economists have done a lot of work on the study of inflation. The Phillips curve has been the focus and the main line of the macroeconomic debate since the Second World War. The Phillips curve describes the trade-off relationship between inflation and unemployment. According to the rule of substitution between them, the government can implement flexible fiscal and monetary policy to realize the effective intervention and regulation of macroeconomics, i.e. raise the unemployment rate to reduce inflation rate or increase the rate of inflation to reduce the unemployment rate (Trevithick and Mulvey 1975). The Phillips curve has made outstanding contributions to the stable development of the capitalist economy. The traditional Phillips curve model is back-ward looking type model, using output gap and inflation lag to explain current inflation. It shows the relationship between the output gap and inflation, however, it is difficult to be consistent with empirical facts. Taylor (1980) and Calvo (1983) started from the pricing behavior of monopolistic competitors, and then derived New Keynesian Phillips curve (NKPC) based on the dynamic general equilibrium model or the staggered pricing theory of firms. Both of them indicated that the inflation rate at each current period is largely determined by the