Tyler Cowen pointed back to this (on the paradox of no market response) today:
Most generally, it seems the initial price move, in response to the Fed’s choice, cannot itself be correct, but that first price move must itself induce further price movements.
So maybe the initial response of the market is wrong? And then there are price movements toward some other value ... like maybe the information equilibrium value?
I've seen this in interest rates (previous link, and origin of the picture above) and exchange rates (more links at this link).
Thus I refute rational expectations.ReplyDelete