It’s clear that the crisis could have indirect effects of this sort. But I think it’s helpful to separate the differing roles of economic and pandemic risk on demand. And as far as the latter is concerned, it turns out that two things matter for this choice (i.e. whether to switch to other things the money people would’ve been spending on risky activities or instead to save it). One is how similar the two sorts of consumption are. If you don’t lose much by substituting one for the other then, in the face of  3  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  3  a jump in infection rates, you’re likely to do more of it. The compensating rise in non-risky spending would be bigger and the decline in total spending smaller. The other factor is the expected duration of the jump. At least as predicted by this simple model, the degree of expenditure switching is greater, and the drop in aggregate spending smaller, the longer the rise in infection rates is expected to persist. It’s when the opposite is true – when people expect pandemic risk to dissipate and conditions for spending to improve relatively soon – that they’re more inclined to wait, and defer some spending (even in aggregate) until that happens. So at least as far as its direct impact is concerned, we might expect the pandemic to have material effects on aggregate consumption only if those effects are also temporary.

And it’s because, unfortunately, we expect unemployment to rise once the furlough schemes are wound 15  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  15  down (the MPC’s central forecast in November was for a peak rate of almost 8%, despite a sharp projected recovery in output as health risks fade) that the appropriate response has been to ease policy significantly. The Committee has also said that it would need firm evidence of a significant narrowing in spare capacity, and of a sustainable return of inflation to the 2% target, before considering whether to withdraw any of this stimulus. Come what may, the MPC will continue to set policy in order to achieve the 2% inflation target, in line with its remit, over the medium term. Thank you. 16  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  16  References Broadbent, B., 2012. ‘Productivity and the allocation of resources’. Speech given at the Durham Business School. Available at https://www.bankofengland.co.uk/speech/2012/productivity-and-the-allocation-ofresources. Cantore, C., Di Pace, F., Masolo, R. M., Miranda-Agrippino, S., and Turrell, A., 2020. ‘Covid-19 briefing: epi-macro 101’. Bank Underground, available at https://bankunderground.co.uk/2020/08/07/covid-19briefing-epi-macro-101/. Charalampidis, N. and Guillochon, J., 2020. ‘The COVID-19 pandemic and the consumption of nondurables and services’. Available at SSRN: https://ssrn.com/abstract=3685336. Chari, V. V., Kehoe, P. J. and McGrattan E. R., 2007. ‘Business cycle accounting’. Econometrica, Vol. 75, pp. 781-836. Davis, S. J. and Haltiwanger, J., 1998. ‘Measuring gross worker and job flows’. In: Labour statistics measurement issues. University of Chicago Press, pp. 77-122.