Y2k

7 Pages Posted: 23 Apr 1999

See all articles by Stephanie Schmitt-Grohé

Stephanie Schmitt-Grohé

Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Martín Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 1999

Abstract

As the millennium draws to an end, the threat posed by the Year 2000 (Y2K) computer 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 Y2K investment peaks at the end of 1999 and that consumption growth is not negatively affected by Y2K, whereas investment in physical capital is.

JEL Classification: E22, E32

Suggested Citation

Schmitt-Grohe, Stephanie and Uribe, Martin, Y2k (January 1999). Available at SSRN: https://ssrn.com/abstract=145594 or http://dx.doi.org/10.2139/ssrn.145594

Stephanie Schmitt-Grohe (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Martin Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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New York, NY 10027
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212-851-4008 (Phone)
212-854-8059 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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