4 6 120 Monthly Average of Official Bank of England Rate and Consumer Confidence Index 8 Quarterly UK Real GDP Growth and Unemployment Rate Source: Office of National Statistics 80 100 Consumer Confidence Index 4 7 Source: Bank of England, Nationwide Ju l-0 9 Ju l-0 8 D ec -0 8 Ju l-0 7 Ja n08 Ju l-0 6 Ja n07 Ju l-0 5 Ja n06 Ja n- 05 0 40 60 2 Consumer Confidence 5 Ju l-0 8 D ec -0 8 08 Ja n- Ju l-0 7 07 Ja n- Ju l-0 6 06 Ja n- Ju l-0 5 Ja n- 05 4 -6 -4 -2 Unemployment rate 6 Base Rate (%) 0 GDP Growth Unemployment rate (%) 2 Base Rate Nominal Monthly Interest rate of UK Resident Banks 15 Sterling Overdraft Credit Card lending 10 Personal Loan 5K Personal Loan 10K Variable Rate Mortgage ep -0 8 D ec -0 8 M ar -0 9 Ju n09 S ep -0 7 D ec -0 7 M ar -0 8 Ju n08 S Ju n07 M ar -0 7 5 Percentage 20 Household Borrowing Interest Rate 4 Fixed rate bond Cash ISA 2 Time deposits Instant access deposits Source: Bank of England ep -0 8 D ec -0 8 M ar -0 9 Ju n09 S ep -0 7 D ec -0 7 M ar -0 8 Ju n08 S Ju n07 M ar -0 7 0 Percentage 6 Household Deposit Interest Rate Mean SD Consumer Confidence Index Spending Questions Retail sales Volume: Month on same month a year ago %change All Retailing Predominantly food stores Predominantly non- food stores VAT receipts: Month on same month a year ago %change Cash VAT receipts Accrued VAT receipts Implied Sales Volume: Month on same month a year ago %change Implied Sales Volume using Cash VAT receipts Implied Sales Volume using Accrued VAT receipts Household aggregate final consumption: Quarter on same quarter a year ago %change Total domestic Total durable Total non-durable Food and non-alcoholic drinks Clothing and footwear Source Nationwide by TNS Period covered May-04 Aug-09 Note ONS 2.8 2.1 3.6 2.3 1.4 3.4 Jan-89 Jan-89 Jan-89 Jul-09 Jul-09 Jul-09 Jan-98 Jan-99 Jul-09 Jul-09 HMRC 3.5 4.2 9.9 8.8 HMRC (VAT receipts) ONS (RPIY) 1.9 2.5 8.2 6.9 Calculated using VAT receipts, VAT rate and RPIY price index Jan-98 Jan-99 Jul-09 Jul-09 Q1-65 Q1-65 Q1-65 Q1-65 Q1-65 Q1-09 Q1-09 Q1-09 Q1-09 Q1-09 ONS 2.6 5.4 1.2 1.0 4.2 2.4 9.0 1.9 2.4 3.9 Weighted, Fixed -Effects Estimation of the Effect of VAT Cut on Prices Dependent variable: Monthly RPI-weighted inflation rate of 2-digit items; Jan 2005- Jun 2009 (1) (2) VAT -0.014 -0.015 (-2.29) (-1.74) VATtrend 0.000 (0.26) 0.001 (0.59) (3) -0.016 (-1.79) 0.001 (0.56) durable*VAT 0.009 (0.59) durable*VATtrend 0.000 (0.02) Time trend 0.001 (6.14) 0.001 (5.92) 0.001 (5.92) Month dummies Observations No. of time periods No. of groups Test of null hypothesis of no pass through (p) Test of null hypothesis of 100% pass through (p) Pass through N 3456 174 64 0.022 0.276 66% Y 3456 174 64 0.081 0.454 70% Y 3456 174 64 0.073 0.596 75% Note: Standard errors are bootstrapped; 999 replications. Pass through rate calculated by dividing the coefficient on VAT by -0.0213 Test of full pass through is a test of whether the coefficient on the VAT dummy is equal to -.0213 3 2 1 09 Ju n- D ec -0 8 M ar -0 9 08 Se p- 08 Ju n- D ec -0 7 M ar -0 8 07 Se p- 07 Ju n- M ar -0 7 0 Percentage 4 Expected Inflation Month GFK NOP Survey of Inflation Attitude 5 year inflation zero coupon, yield from gov. securities Source: Survey of inflation attitudes conducted by GfK NOP on behalf of the Bank of England 40 60 80 100 Household Appliances Relative Value and Present Situation Index Household Appliances Source: Nationwide Consumer Confidence Index conducted by TNS Present Situation Index Ju n09 ec -0 8 D Ju n08 ec -0 7 D Ju n07 ec -0 6 D Ju n06 ec -0 5 D Ju n05 ec -0 4 D Ju n04 20 1 Dec 08 VAT Cut Ju n07 Se p07 D ec -0 7 M ar -0 8 Ju n08 Se p08 D ec -0 8 M ar -0 9 Ju n09 7 ar -0 M Real interest rate calculated using expected inflation figures from NOP survey Relative value: POSITIVE figure divided by the sum of the POSITIVE and NEGATIVE to yield a proportion Source: Nationwide, Bank of England 15 10 Household Appliances Interest rate: 0 5 Credit Card -5 50 60 70 80 90 Interest rate (Percentage) 20 100 Household Appliances Relative Value and Real Interest Rates Time deposits 100 120 Household Appliances Relative Value, Present Situation and Expectation Indices Household Appliances Expectation Index Source: Nationwide Consumer Confidence Index conducted by TNS Present Situation Index n09 Ju -0 8 ec D n08 Ju -0 7 ec D n07 Ju -0 6 ec D n06 Ju -0 5 ec D n05 Ju -0 4 ec D Ju n04 20 40 60 80 1 Dec 08 VAT Cut Retail Sales Volume %Change on Year Earlier: Moving average 8 All Retailing, Predominantly Food Stores and Predominantly Non-food Stores 4 2 0 -2 ec -0 M 4 ar -0 Ju 5 n0 Se 5 p0 D 5 ec -0 M 5 ar -0 Ju 6 n0 Se 6 p0 D 6 ec -0 M 6 ar -0 Ju 7 n0 Se 7 p0 D 7 ec -0 M 7 ar -0 Ju 8 n0 Se 8 p0 D 8 ec -0 M 8 ar -0 9 D Percentage 6 1 Dec 08 VAT Cut All Retailing Predominantly Non-food Source: Office of National Statistics Predominantly Food Dependent variable: Growth rate in volume of non-food sales less growth Rate in the volume of food sales (1) VAT 3.837 (3.28) VATtrend -1.189 (-5.68) Constant 2.749 (5.95) Number of Observations Note: Standard errors are Newey-West 54 • Difficult to rationalize the time pattern with a model. θ u (ct ) ct 1 1/ 1 1/ unconstrained/forward looking: 1 t1 c1 ln 1 t1 ln c1 ln c 1 t2 c2 1 r 1.2 ln 1 ln 1 t1 r W0 y1 1 1 r y2 ln ln 1 t1 ln(1 ) liquidity constrained: 1 t1 c1 W0 y1 ln c1 ln(1 t1 ) 1 ln(1 t2 ) 1 1/ u (ct ) ln ct 1 ct c 1 1/ ct c ct ln(1 rt 1 ) ut 1