The first is that growth in the immediate aftermath of the referendum has been stronger than the Bank, and other major forecasters, had expected. For example, growth in the third quarter of 2016 is currently estimated to be 0.5%. This compares with 0.1% growth in the third quarter expected at the time of the Bank’s August Inflation Report. This is welcome news. The main source of this upside news to activity has been the buoyancy of consumers. They appear to have kept calm and carried on spending on the high street, in the car showrooms and in the estate agents. The Bank’s latest survey of UK households explains why. It suggests UK households’ perceptions of income and job prospects have, at least so far, been largely unaffected by Brexit. That is true too in surveys of consumer sentiment which remain around historical average levels. 19  Vlieghe (2016). 11  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  11  Spending by companies shows a more mixed picture. For example, according to the Bank’s new company 20  Decision Maker Panel , just over half of all firms anticipate no material impact of Brexit on their investment plans over the coming year. That leaves just under a half of all firms expecting some impact on investment, consistent with surveys of gently falling investment intentions by the CBI, BCC and the Bank’s Agents. The second piece of significant news since August has been around the exchange rate.
Second, they can buy assets – which, in this hypothetical economy, means cars – increasing demand for them and hence their price. These actions lower the cost of borrowing and raise the price of assets in the two-car economy. Both support the production of cars by firms and the consumption of cars by households. In this way, aggregate activity in the economy is boosted, at least in the short run. By lowering interest rates and purchasing assets, a central bank can help meet its mandate of supporting the economy as a whole. If the aggregate impact of looser monetary policy on the economy is positive, what about its distributional impact across regions? In this simple setting, lower interest rates boost the incomes of net borrowers in Red Car region, while reducing the income of net savers in Blue Car region. As the income of Red Car consumers is lower than Blue Car consumers, this shrinks the distribution of incomes across the economy. The effect of asset purchases is to boost the wealth of all car owners, with the bigger boost felt by those whose car wealth is largest. So although both regions are better off in net wealth terms, Blue Car region benefits more than Red Car region. Put differently, the distribution of wealth across regions may widen as a result of asset purchases. Or that at least is what this simple, stylised economy would imply. 3  The Real Economy Now let’s return to planet earth, from the hypothetical to the real world.