Underreacting and then Overreacting to Policy Shocks

As you make your way through Terminal 5 in Heathrow airport, there are plenty of opportunities to buy a T-shirt bearing the slogan “Keep Calm and Carry On”. The wearer of such a garment, upon their return to the United States, is presumably advertising the idea that a visit to the blessed plot has bestowed upon them the ability to weather all manner of shocks with equanimity. When it comes to financial markets, however, the British could learn calmness from the Americans. The U.K. gilt market, petted and coddled by timid politicians, seems to descend into turmoil under the mildest provocation. Meanwhile, U.S. markets, hardened by years of unruly words and abrupt policy changes from Washington, does indeed seem to “keep calm and carry on”.