By the same token, none of this means that, over the medium term, economic risk won’t continue to affect consumers’ appetite for spending, as it’s always tended to in the past. If rates of unemployment were to remain relatively high even two or three years from now, it’s likely the saving rate will also be above average. But I do think it’s these more conventional factors – economic risk rather than pandemic risk – that we should have in mind when thinking about what might happen to saving and consumption over the medium term. 10  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  10  Indeed I think this would be true even without taking into account the likely improvements in health treatments (the new vaccines, for example). The consequences for supply and costs  A market economy is a dynamic place. Adapting to economic conditions, meeting changes in consumer tastes and adopting new production methods – this is what it’s meant to do. And underneath the macroeconomic surface, there is always a significant degree of churn of this sort. Even in normal times jobs are destroyed and created all the time, buildings re-purposed and new techniques learned. Most of the time, as macro-economists, we can safely ignore these things (we certainly tend to). We assume that aggregate quantities are determined only by other aggregates – potential output depends only on total capital and labour, for example, and inflation only on some whole-economy version of spare capacity.

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.