Discussion — Lectures 15 & 16

This session covers Lecture 15: Banks and Global Liquidity and Lecture 16: Foreign Exchange

• Lecture 15 Notes
• Lecture 16 Notes

Lecture 15 uses the context of a 19th-century gold-standard world to introduce the Treynor model to foreign exchange markets. We flesh out the international dimension to what we covered in Lecture 9. FX dealers operate within the outside spread set by the gold points. International gold parity must hold within a narrow band or a gold drain will push you off the gold standard.

Lecture 16 gives us a framework for reasoning about the foreign exchange dealer market in the context of a flexible-exchange-rate system. This framework allows us to tell a story about why uncovered interest parity (UIP) and the expectations hypothesis (EH) of the term structure both fail.

Mehrling's thinking on foreign exchange was a work in progress when the lectures were filmed in 2012. He turned them into a paper in 2013.

• Essential hybridity: a money view of FX

The paper uses the opposite exchange rate quoting convention from Lecture 16, and uses the term "forward interest parity" in place of "covered interest parity."

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