Working Paper: NBER ID: w21884
Authors: Barry Eichengreen; Romain Lafarguette; Arnaud Mehl
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: Foreign exchange market; Submarine fiber optic cables; Technology; Geographical distribution; Financial transactions
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 cable connections (L96) | share of foreign exchange transactions in the issuing country (F31) |
| submarine fiber optic cable connections (L96) | share of offshore trading (G15) |
| submarine fiber optic cable connections (L96) | London's share of global foreign exchange turnover (G15) |
| submarine fiber optic cable connections (L96) | attenuation of existing spatial frictions (F12) |
| attenuation of existing spatial frictions (F12) | share of offshore trading (G15) |