Cyclical Activity and Inflation Under Secular Stagnation: Empirical Evidence Using Data on Japan's Lost Decades

This paper disputes the suspicions about the existence and stability of the trade-off between nominal inflation and the real economy when missing deflation and reinflation under secular stagnation by providing empirical evidence of the stability of this short-run trade-off. To this end, we construct a simple measure of demand-pull pressures, namely the cyclical activity index, using time-series data for a period that includes Japan's secular stagnation. We then quantitatively examine the relationship between inflation and the measured cyclical activity. The empirical results support that the cyclical activity index has a stable and economically meaningful relationship with short-term inflation.