Government Employment Shocks, Policy Coordination, and Debt Structure

Hyeongwoo Kim (), Ren Zhang and Shuwei Zhang ()
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Hyeongwoo Kim: Department of Economics, Auburn University
Ren Zhang: Department of Finance and Economics, Texas State University
Shuwei Zhang: Department of Economics, Towson University

No 2026-07, Working Papers from Towson University, Department of Economics

Abstract: The labor market effects of government employment shocks in the United States have varied markedly across the postwar period. Using a Bayesian structural VAR with max-share identification, we document three distinct regimes; before the Volcker disinflation, public hiring crowded in private employment, raised real wages, and reduced unemployment; during the Great Moderation, the same shocks became contractionary; and after the Global Financial Crisis, their effects were largely muted. We account for these changes with a New Keynesian DSGE model featuring public employment, alternative monetary–fiscal regimes, and a maturity structure of government debt. The model shows that while monetary–fiscal coordination holds in both the pre-Volcker and post-GFC periods, debt maturity differs sharply across them. Longer debt maturity weakens fiscal transmission even under passive monetary policy, whereas aggressive anti-inflationary policy renders government employment shocks contractionary regardless of debt maturity.

Keywords: Debt Maturity; Government Employment; Max-Share Identification; Policy Coordination; Time-varying Effectivenes. (search for similar items in EconPapers)
JEL-codes: E32 E61 E62 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2026-04, Revised 2026-04
New Economics Papers: this item is included in nep-dge
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