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

Abstract

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. 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.

Keywords: Uncertainty, Inflation, Consumption, Consumer Durables, Expectations, Surveys

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