Understanding the Sources of Macroeconomic Uncertainty

We propose a decomposition to distinguish between Knightian uncertainty (ambiguity) and risk, where the first measures the uncertainty about the probability distribution generating the data, while the second measures uncertainty about the odds of the outcomes when the probability distribution is known. We use the Survey of Professional Forecasters (SPF) density forecasts to quantify overall uncertainty as well as the evolution of the different components of uncertainty over time and investigate their importance for macroeconomic fluctuations. We also study the behavior and evolution of the various components of our decomposition in a model that features ambiguity and risk.

Keywords: Uncertainty, Risk, Ambiguity, Knightian Uncertainty, Survey of Professional Forecasters, Predictive Densities

JEL Classification: C22, C52, C53

Suggested Citation: Suggested Citation

Rossi, Barbara and Sekhposyan, Tatevik and Soupre, Matthieu, Understanding the Sources of Macroeconomic Uncertainty (August 2, 2016). Available at SSRN: https://ssrn.com/abstract=2780213 or http://dx.doi.org/10.2139/ssrn.2780213