Knightian uncertainty represents a situation in which it is no longer possible to form expectations about future events. We propose a method to directly measure Knightian uncertainty. Our approach relies on firm-level data and measures the share of firms that do not 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. We 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.
Does increased economic policy uncertainty dampen investment of firms? We provide direct evidence on this question by examining the effects of an unexpectedly accepted and far-reaching referendum in Switzerland in February 2014. The outcome put several economically relevant agreements between Switzerland and its main trading partner, the European Union, at stake. Using firm-level panel data covering the 2009–2015 period and data from two special surveys levied shortly after the vote, we examine how the induced policy uncertainty affected investment of Swiss firms. Our Difference-in-Differences-in-Differences estimations and complementary survey results give strong evidence that the uncertainty caused by the vote dampened, as theoretically expected, investment of exposed firms with irreversible investment by as much as one quarter in the two years following the vote. Exposed firms that can reverse investment appear rather to increase investment in the year after the vote. Our survey evidence suggests that these firms engage in investment to streamline their production.
A sudden change in monetary policy happened in Switzerland on January 15th, 2015. The Swiss National Bank removed the lower exchange rate bound vis-à-vis the Euro. We believe that uncertainty concerning a vital economic indicator as the exchange rate should influence economic activities. We argue that the unexpected removal of the lower bound induced a temporary uncertainty about future prices in foreign markets and believe that this influenced firm investment in the short term. We exploit the unexpected change in monetary policy as a natural experiment and use the continuous nature of business tendency surveys to determine the role of uncertainty in the immediate aftermath of the event. Changes in firm-level expectations are measured by specially designed survey questions. We use this information to disentangle first and second moment effects. We find that uncertainty negatively affects investment in equipment and machinery through real-option effects and believe that uncertainty positively influences expenditures in research and development through growth-option effects. Finally, we argue that focusing on aggregate gross fixed capital formation masks important insights and suggest the use of disaggregated investment data in future research on the relationship between uncertainty and investment.