Of course, in reality the trend is neither linear nor exogenous – this is why we can’t use such simple charts for informing policy. It instead depends on the potential of the economy to generate sustained economic growth.
And the factors generating growth – for example, the rate of technological progress, the institutional framework or the working-age population – do change over time, which is an issue I will return to later. The question, however, is whether booms or recessions themselves affect the trend, and by how much – the hysteresis view.