Sectoral Supply and Demand Shocks during COVID-19: Evidence from Mexico

The COVID-19 pandemic has undeniably caused both supply and demand shocks. Nevertheless, it is uncertain to what extent each factor contributed more to the evolution of prices and economic activity at different points since the onset of the pandemic. Whether inflationary pressures are mainly due to demand or supply shocks is an important matter for the stance of monetary policy. By employing a sign-restricted SBVAR, we study supply and demand factors as potential sources of heterogeneity in sectoral performance of economic activity in Mexico. We find that during the peak contraction in 2020-2Q, the demand shock was the dominant source of fluctuation across most sectors. Moreover, we assess the extent to which economic activity responds to foreign shocks and find that domestic demand shocks are the primary drivers of GDP fluctuations in 2020-2Q, with external demand and supply conditions and exchange rate shocks also playing significant roles. In contrast, since the beginning of 2021, external supply has negatively contributed to the variation of several sectors, particularly in industrial production, whereas domestic and external demand factors have generally positively contributed.

Sectoral Spillovers Across Space and Time

We examine the spillovers from sectoral shocks across sectors, countries, and over time. Using a large cross-country sample from 1995 to 2014 with detailed sectoral information, we show that supply and demand shocks propagate upstream and downstream in the production and distribution network, both domestically and abroad. We estimate substantial domestic sectoral spillovers in our global sample, and find foreign spillovers to be sizeable as well. We document a persistent effect of negative shocks, especially supply shocks coming from the same sector, on a sector's share in aggregate gross value added in a country. We also illustrate our results by quantifying the significant role spillovers played in amplifying the sectoral shocks associated with the COVID-19 pandemic. Our findings have implications for the design of policies with a sectoral dimension, such as the allocation of sector-specific public investment.