We examine the conditions under which steady states with low real interest rates—real rates substantially below the output growth rate—exist in an overlapping generations model with production, capital accumulation, a labor-leisure trade-off, technological progress, and agents who live for many periods. The number of periods in an agent's life (n) is left open for much of the analysis and determines the temporal interpretation of a time period. The qualitative properties of the model are largely invariant to different values of n. We find that two low real interest rate steady states exist for empirically plausible values of the parameters of the model. Outside liabilities such as fiat currency or unbacked government debt are valued in one of these steady states.

This paper develops the Kiyotaki-Wright model of monetary general equilibrium in which trade is bilateral and enforced by requiring that transactions be quid pro quo, and studies which goods are chosen, and under what conditions, as media of exchange. We prove the existence of a rational expectations equilibrium in which agents' expectations concerning trading opportunities are realized in the present and all future periods. We also show that, exceptional cases aside, no rational expectations barter equilibrium exists; that an equilibrium generally supports multiple money goods; and that a fiat money (i.e., a good that is produced, has minimum storage costs, but is not consumed) cannot be traded in rational expectations equilibrium.