Measuring Knightian Uncertainty
KOF Working Paper No. 456 (2019)
46 Pages Posted: 6 Jun 2019 Last revised: 27 Aug 2020
Date Written: May 9, 2019
Knightian Uncertainty represents a situation in which it is no longer possible to form expectations about future events. We propose the first method to directly measure Knightian Uncertainty. Our approach relies on firm-level data and measures the share of firms that are not able to formalize expectations about their future demand. We construct the Knightian Uncertainty indicator for Switzerland and show that the indicator is able to identify times of high uncertainty and detects uncertainty shocks well. We further evaluate the indicator by comparing it to established uncertainty measures. We find that a one standard deviation innovation of the Knightian Uncertainty Indicator leads to a negative and persistent reduction of investment.
Keywords: Knight, uncertainty, measurement, business survey
JEL Classification: D80, D84
Suggested Citation: Suggested Citation