Working Paper: CEPR ID: DP16044
Authors: Barry Eichengreen; Romain Lafarguette; Arnaud Mehl; Massimo Ferrari
Abstract: We analyze the impact of technology on the production and trade in services, focusing on the location of foreign exchange transactions and the effect of submarine fiber-optic cable connections. Cable connections between local markets and major financial centers reduce the costs of trading currencies locally and increase the share of currency transactions taking place in the issuing country. But they also attenuate the effect of existing spatial frictions that prevent transactions from moving offshore to take advantage of agglomeration economies and thick-market advantages of major financial centers. In practice, this second effect dominates. Our estimates suggest that the advent of cable connections boosted the share in global turnover of London, the world’s largest trading venue, by as much as one-third.
Keywords: technology; geography; foreign exchange market; submarine fiber optic cables
JEL Codes: F30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| submarine fiber optic cables (L96) | share of foreign exchange transactions in London, New York, and Tokyo (G15) |
| reduced transaction costs associated with fiber optic connections (L96) | increased offshore trading (F69) |
| fiber optic connections allow local sales desks to access timely information (L96) | retain transactions onshore (F38) |
| fiber optic connections (L96) | weaken impact of distance, domestic market liquidity, and capital controls on attracting trading onshore (F69) |