The purpose of this paper is to find alternative strategies to change negative output gaps in China.
A path Philips curves approach is proposed to investigate output gaps, which develops hybrid Philips curves with the control variables of money, house prices and interest rates.
An alternative strategy to stop the decline in output gaps rate is to perform interest rate, house price, and money growth rate about 3, 1 and 15 percent, respectively. The results also indicate that only one of monetary increase, changes in interest rates, and house price adjustments are difficult to change the negative output gap.
Alternative strategies cannot only change the negative output gap, but also succeed in pushing the inflation rate down to 3 percent.
This study provides a new path Philips curves to simulate how the macroscopic control variables influence output and inflation. It provides a useful insight for stopping the decline in output gaps.
This paper is supported by the National Natural Science Foundation of China (70973110).
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