Firms' Knightian Uncertainty during the COVID-19 Crisis

Author Name MORIKAWA Masayuki (President and CRO, RIETI)
Creation Date/NO. September 2022 22-E-089
Research Project Empirical Studies on Crises and Issues in Global Supply Chains
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This study uses panel data (2004Q2–2021Q2) from a large-scale official statistical survey of Japanese firms to document the trends and characteristics of Knightian uncertainty, focusing on the impact of the COVID-19 pandemic. In addition, we analyze the relationship between Knightian uncertainty and investment at the firm level. According to the results, first, unlike the global financial crisis, which was characterized by a definite negative projection, uncertainty increased significantly during the COVID-19 crisis. Second, there is a positive correlation between the uncertainty over firms’ business conditions (micro uncertainty) and the uncertainty over domestic economic conditions (macro uncertainty), but there are many firms whose business outlooks are certain even if the macroeconomic outlook is uncertain. Third, uncertainty has a negative association with future investments at the firm level, and the role of micro uncertainty dominates that of macro uncertainty.

This is the English version of the Japanese Discussion Paper (22-J-029) with some additional information and changes.