Government policies and manufacturing production during the COVID-19 pandemic

Abstract

This paper evaluates the impact of government support and containment measures on the manufacturing production cycle (MPC) of 39 countries during the COVID-19 pandemic. To the best of our knowledge, the effects of these variables on the MPC have not been studied. To obtain reliable evidence, we resort to two complementary econometric techniques: the Arellano-Bond Generalized Method of Moments (GMMs) and the Arellano-Bover GMMs. The evidence is consistent across econometric methods in showing that: 1) Closure and containment measures have been recessionary, 2) Income support measures and interest rate cuts have been effective in raising manufacturing production, and 3) Real exchange rate depreciations do not stimulate (and could even discourage) manufacturing production, presumably because they make imported intermediate inputs more expensive. Therefore, raising consumption through higher income and investment through lower interest rates can alleviate the recessionary effects of closure and containment policies, whereas depreciating the currency may not be effective to boost manufacturing production amid falling world trade and disrupted global supply chains, which could interact with a weaker currency to make imported intermediate inputs even more costly.