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a guest article, Olivier Blanchard says that policymakers should focus on reducing uncertainty
CRISES feed uncertainty. And uncertainty affects behaviour, which feeds the crisis. Were a magic wand to remove only objective, but also subjective uncertainty, or what economists, following Chicago economist Frank Knight’s early 20th-century work, call “Knightian uncertainty”. Objective uncertainty is about what Donald Rumsfeld (in a different context) referred to as the “known unknowns”. Subjective uncertainty is about the “unknown uncertainty, the next few quarters would still be tough (some of the damage cannot be undone), but the crisis would largely go away.From the Vix index of stockmarket volatility (see chart), to the dispersion of growth forecasts, even to the frequency of the word “uncertain” in the press, all the indicators of uncertainty are at or near all-time highs. What is at work is not