International Monetary Fund
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Institutional Affiliation: European Central Bank, Paris School of Economics, Peking University
NBER Working Papers and Publications
|January 2016||Cables, Sharks and Servers: Technology and the Geography of the Foreign Exchange Market|
with , : w21884
We analyze the impact of technology on production and trade in services, focusing on the foreign exchange market. We identify exogenous technological changes by the connection of countries to submarine fiber-optic cables used for electronic trading, but which were not laid for purposes related to the foreign exchange market. We estimate the impact of cable connections on the share of offshore foreign exchange transactions. Cable connections between local markets and matching servers in the major financial centers lower the fixed costs of trading currencies and increase the share of currency trades occurring onshore. At the same time, however, they attenuate the effect of standard spatial frictions such as distance, local market liquidity, and restrictive regulations that otherwise prev...