Regional supply, demand and labor shocks on the manufacturing sector during COVID-19 in Mexico

Abstract

This paper analyzes the contribution of supply, demand, and labor market shocks, to the evolution of regional production and inflation of manufactured goods in Mexico within the context of the pandemic. Under the identification of a Bayesian Structural Vector Autoregressive (SBVAR) model with zero and sign restrictions, it is found that since 2021, external demand shocks increased their contribution relative to local shocks in explaining the growth of manufactured goods production in all regions except the South; meanwhile, external supply shocks increased their positive contribution in explaining inflationary pressures across all regions. On the other hand, from 2022 onwards, labor supply shocks have contributed to the production and inflation of manufactured goods mainly in the Northern and North-Central regions, while wage bargaining shocks have emerged as drivers of inflationary pressures in all regions.