Drivers of bank credit evolution in Mexican regions during the COVID-19 pandemic

Abstract

This paper examines the impact of supply and demand shocks on the evolution of bank credit to firms across Mexican regions during the COVID-19 pandemic, using a Structural Bayesian Vector Autoregression (SBVAR) model with sign restrictions and data from January 2006 to May 2023. Our results indicate that bank credit to firms rose at the onset of the pandemic, likely due to precautionary motives, but subsequently contracted, particularly in the central region. The analysis shows that demand factors predominantly explained this contraction in the central region, whereas supply factors were more relevant in the northern and north-central regions. This regional divergence may reflect the weaker post-pandemic recovery in the central region and the manufacturing-related cost pressures and input shortages faced in the northern regions. Starting in 2022 and up to May 2023, regional demand shocks played a key role in supporting the recovery of bank credit, especially in the northern and central regions.