An empirically plausible model of low real interest rates and unbacked government debt

We study the properties of an overlapping generations model with many-perio d-lived agents, neoclassical production and capital accumulation, labor-lei sure decisions, population growth, and technological progress. We demonstra te that a plausibly calibrated version of this model has 'monetary steady s tates' - Samuelson-case steady states with large real stocks of unbacked go vernment debt. These steady states can duplicate a number of important feat ures of US post-war data, including three phenomena that challenge other so rts of calibrated models: the low average real interest rate on US governme nt debt, the government's success in reducing the debt/GDP ratio without ru nning large budget surpluses and the relatively high ratio of net saving to output. (C) 1999 Elsevier Science B.V. All rights reserved.