Measuring Uncertainty Based on Rounding: New Method and Application to Inflation Expectations

Carola Conces Binder

Haverford College - Department of Economics

April 24, 2015

Although uncertainty plays an important role in economic decisionmaking, empirical measures of individuals’ uncertainty are rare. The literature on cognition and communication documents that people use round numbers to convey uncertainty. This paper introduces a method of quantifying the uncertainty associated with round responses in survey data, allowing construction of micro-level uncertainty measures from pre-existing data. To demonstrate the usefulness of this method, I construct a measure of inflation uncertainty since 1978 and provide support for its validity. Mean inflation uncertainty is countercyclical and correlated with inflation disagreement, inflation volatility, and the Economic Policy Uncertainty Index. Inflation uncertainty is lowest among high-income consumers, college graduates, males, and stock market investors. More uncertain consumers are more reluctant to spend on durables, cars, and homes. Round number responses are common on a variety of other surveys, suggesting applications of this method for measuring uncertainty about other variables.

Number of Pages in PDF File: 55

Keywords: monetary policy, inflation expectations, uncertainty, consumption, consumer durables, Phillips curve

JEL Classification: D800, D830, D840, E200, E210, E310

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Date posted: March 12, 2015 ; Last revised: July 7, 2016

Suggested Citation

Binder, Carola Conces, Measuring Uncertainty Based on Rounding: New Method and Application to Inflation Expectations (April 24, 2015). Available at SSRN: https://ssrn.com/abstract=2576439 or http://dx.doi.org/10.2139/ssrn.2576439

Contact Information

Carola Conces Binder (Contact Author)
Haverford College - Department of Economics ( email )
Haverford, CT 19041
United States
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