Abstract

We propose a decomposition to distinguish between Knightian uncertainty (ambiguity) and risk, where the ?rst 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 di¤erent components of uncertainty over time and investigate their importance for macroeconomic ?uctuations. We also study the behavior and evolution of the various components of our decomposition in a model that features ambiguity and risk.