# 4 Results

This section presents and discusses the results of the estimation of the empirical specications described in equations (7), (8), and (9) that test for the qualitative and quantitative importance of a sector's natural hedge for a country's export structure. It rst presents the baseline results in levels and growth rates, addresses several concerns about these specications through a battery of robustness tests, and explores the role of the availability of formal nancial hedging instruments for exchange rate risk.

## 4.1 Baseline results

Countries with higher nominal exchange rate volatility tend to export relatively more goods whose international price is negatively correlated with their exchange rate uctuations, especially when this price is also volatile. This is shown in the dierent columns of Table 3. Panel A shows the estimated coecients for three versions of equation (7) that include only the interaction of _CORR_ , average exchange rate volatility, and average price volatility _CORR × SDXR × SDP_ , and that sequentially adds controls for factor content and product dierentiation. In all regressions, the coecient on the interaction, _β_ , is negative and statistically signicant.

The economic magnitude implied by the coecient is small but meaningful. Since the coecient on natural hedge is akin to a di-in-di estimator, a useful way to gauge its quantitative importance is to conduct a counter-factual experiment of what would be the change in relative export shares of dierent commodities resulting from an increase in volatility. Let _s_<sup>10</sup> and _s_<sup>90</sup> be the export shares of the good at the 10th and 90th percentile of correlation, respectively. An increase from the 10th to the 90th percentile in the combined volatility of nominal exchange rate and international prices ( _SDXR × SDP_ ) would raise _s_<sup>10</sup> _/s_<sup>90</sup> , the ratio of the export share of a good at the 10th percentile level of correlation (correlation of -0.55) relative to the share of a good at the 90th percentile of correlation (correlation of 0.28), by 45 percent. This is about 20 percent of the standard deviation of relative shares ( _s_<sup>10</sup> _/s_<sup>90</sup> ).

Alternatively, to gauge only the importance of exchange rate volatility, one can keep the volatility of international prices at its average level and repeat the counter-factual. In this case, an increase in exchange rate volatility from the 10th to the 90th percentile raises by 37 percent the ratio of the export share of a good at the 10th percentile level of correlation relative to a good at the 90th percentile, which corresponds to 15 percent of the standard deviation of (log) export shares. Of course, the relative dierences are larger when comparing commodities with larger dierences in natural hedge. Similar increases in combined volatility and in exchange rate volatility result in relative increases in export shares of 32 and 26 percent of the standard deviation of relative shares when comparing commodities with correlations of -0.7 and 0.7. Therefore, according to the estimates, changes in natural hedge could induce changes in relative shares of about one16