As the millennium draws to an end, the threat posed by the Year 2000 (Y2K) problem is inducing vast private and public spending on its remediation. In this paper, we model the Y2K problem as an anticipated, permanent loss in output whose magnitude can be lessened by investing resources in advance. We embed the Y2K problem into a dynamic general equilibrium framework and show that our model replicates three observed characteristics of the dynamics triggered by the Y2K bug: (1) Precautionary investment: investment in solving the Y2K problem begins before the year 2000; (2) Investment delay: although economic agents have been aware of the Y2K problem since the 1960s, investment did not begin until recently; (3) Investment acceleration: as the new millennium approaches, the amount of resources allocated to solving the Y2K problem increases. Furthermore, the model predicts that output net of resources devoted to solving the Y2K problem need not decline in 2000.
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Publisher Info
Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number
199832.
Stephanie Schmitt-Grohe & Martin Uribe, 1999.
"Y2k,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 850-856, October.
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Find related papers by JEL classification: E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles