Measuring Knightian Uncertainty

KOF Working Paper No. 456 (2019)

46 Pages Posted: 6 Jun 2019 Last revised: 27 Aug 2020

See all articles by Andreas Dibiasi

Andreas Dibiasi

EURAC Research; ETH Zürich - KOF Swiss Economic Institute

David Iselin

ETH Zurich, KOF Swiss Economic Institute

Date Written: May 9, 2019

Abstract

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

Dibiasi, Andreas and Iselin, David, Measuring Knightian Uncertainty (May 9, 2019). KOF Working Paper No. 456 (2019), Available at SSRN: https://ssrn.com/abstract=3391117 or http://dx.doi.org/10.2139/ssrn.3391117

Andreas Dibiasi (Contact Author)

EURAC Research ( email )

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ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

David Iselin

ETH Zurich, KOF Swiss Economic Institute ( email )

Zurich
Switzerland

HOME PAGE: http://www.kof.ethz.ch/de/ueber-uns/personen/david-iselin/

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