This paper studies measurement of the business cycle from an economic rather than purely statistical perspective. Since the natural level of output is associated with price stability it should be possible to infer its behavior from relative movements of inflation and output, given a model of price dynamics. For example, if inflation accelerates when output slows it seems clear that the natural level has declined. While long-term growth is due to the natural level, short-term fluctuations will be generated by both nominal demand shocks and real shocks to the natural level. Results for Japan's real GNP are presented.
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.