Charalampidis and Guillochon (2020) and Guerrieri et al (2020) also consider Covid in multi-sector models. See Cantore et al (2020) for a brief introduction to the epimacro literature. 7  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  7  that incomes have been relatively stable may not be as unrealistic as it might have been. It’s in any case useful, I think, to try to separate the direct effects of the pandemic on spending from its second-round impact, via incomes and economic risk. It’s these direct effects that these simulations  Chart 5a: Two stylised paths for the pandemic, one  attempt to represent. Chart 5(a) plots two  more persistent than the other  stylised paths for infection risk, one of which lasts a lot longer than the other (blue versus red). Our hypothetical consumer understands these dynamics and reacts accordingly in Chart 5(b). Consumption of the risky good, which at the start is assumed to account for around a quarter of the total, follows (inversely) the path of the infection. Spending on non-risky things moves in the opposite direction – there’s a degree of expenditure switching in both cases – but it’s more significant, and the initial and corresponding fall in aggregate spending less marked, in the blue case, when the virus is expected to persist for longer. Thus the response of consumer spending in aggregate is either drawn out but relatively limited (blue) or sizeable but shorter-lived (red).
However, going out to eat still costs far more than it did, relative to other stuff. So you’ll probably be inclined to go less often. But what do you do with the money you would’ve spent? Do you simply switch it to other things, leaving your aggregate consumption unchanged? Or do you reduce your total spending as well, and instead save a little more? At least for the idealised consumer of simple economic theory, two things turn out to matter for this decision. One is the extent to which there are other, close substitutes for the taxed activity. If you liked cooking at home, or indeed anything else, almost as much as going to a restaurant you’d be more inclined to switch your spending immediately to these other things. Your total consumption wouldn’t change much. In general, a hike in a particular sales tax will have smaller effects on aggregate spending, and result instead in more expenditure-switching, if it’s levied on something for which there are similar (and untaxed) alternatives. The other important factor is how long you expect the policy to last. If he thinks the tax hike is permanent, our idealised consumer of economic theory would substitute his spending straightaway towards other goods or services, regardless of whether they’re close substitutes. If not – if he expects the government to come to its senses at some point, and reverse the policy – he’ll be more inclined to wait until that happens.