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Debt dynamics and fiscal policy stance in Cape Verde: Is there evidence of pro-cyclical behavior?

Ribeiro, Ana Paula and Carvalho, Vitor and Sanches, Hélder (2021): Debt dynamics and fiscal policy stance in Cape Verde: Is there evidence of pro-cyclical behavior?

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Abstract

Over the past two decades, Cape Verde has evolved positively in regards to main macroeconomic indicators. But, in contrast with that observed in Sub-Saharan Africa, public debt increased sharply in the aftermath of the 2008-09 crisis, which may constrain growth and development.

In order to assess if recent debt records result from pro-cyclical fiscal policy, we make an exhaustive analysis of debt dynamics in Cape Verde: i) we provide detailed records on debt dynamics and its composition and ii) through estimating cyclical elasticities of the budget balance, we compute structural primary deficits to identify the discretionary fiscal policy stance.

We conclude that recent debt increase was mainly determined by primary structural deficits. However, discretionary policy was adequately counter cyclical or, when pro-cyclical, it was associated with investment efforts. Thus debt correction will be an easy task to perform because debt bias does not mimic deficit bias due to political-cycle motivations.

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