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Monetary steady states in a low real interest rate economy

Listed author(s):
  • James B. Bullard
  • Steven Russell

We study the properties of an overlapping generations model with many-period-lived agents, neoclassical production and capital accumulation, labor-leisure decisions, population growth, and technological progress. We demonstrate that a plausibly calibrated version of this model has "monetary steady states" -Samuelson-case steady states with large real stocks of unbacked government debt. These steady states can duplicate a number of important features of U.S. postwar data, including three phenomena that challenge other sorts of calibrated models: the low average real interest rate on U.S. government debt, the government's success in reducing the debt/GDP ratio without running large budget surpluses and the relatively high ratio of net saving to output.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1994-012.

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Date of creation: 1998
Publication status: Published in Journal of Monetary Economics, v. 44, no. 3, December 1999, pp 477-508 (title: An empirically plausible model of low real interest rates and unbacked government debt)
Handle: RePEc:fip:fedlwp:1994-012
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