The fluctuations in price levels not only reflected the complexity of this inflation cycle, but also brought practical difficulties for the implementation for policy choices. The accurate determination of causes of inflation became the key to controlling inflation. Early studies of inflation causes mainly rely on the traditional Phillips curve, which is built on the relationship between domestic inflation and output. It emphasizes the effects of price levels by a country's money supply, output gap, and labor costs, and believes that excess liquidity, increases in production factors, and increased productivity will create an internal inflation pressure. Yet with increasing globalization, more and more scholars begin to emphasize the effects of external impacts on a country's inflation. They think that as global economic relations grow closer, the prices of foreign primary commodities will directly affect the inflation level of a country. The strengthening of trade and financial cooperation will also change the dynamics of a country's inflation. Inflation becomes less sensitive to domestic factors such as output gap and liquidity, and the traditional Phillips curve tends to flatten. Excerpted from Structural Reform in China's Regional Governments, Volume 1 by Qingwang Guo All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.
