DP11415 Understanding the Sources of Macroeconomic Uncertainty

Author(s): Barbara Rossi, Tatevik Sekhposyan, Mattheiu Soupre
Publication Date: July 2016
Keyword(s): Ambiguity, Knightian Uncertainty, Predictive Densities, risk, Survey of Professional Forecasters, uncertainty
JEL(s): C22, C52, C53
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11415

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.