commodity relative to the global exports of that commodity. This specication can be easily derived in the same way that equation (7) was derived in section 2. Since a commodity may be important for a country without necessarily representing a high share of global trade in that commodity, this specication should be less aected by the reverse causality mechanism. The results again show a signicantly negative relation between natural hedge and global export share of a commodity.<sup>9</sup> Finally, the best way of addressing any concern of reverse causality is to use instruments. Of course, the challenge is to nd relevant exogenous instruments. The regression in Column (7) show the results obtained instrumenting the correlation between a goods' international price a country's nominal exchange rate by the correlation observed for that good in the UK, France, and Japan. These instruments should capture global movements in the value of the dollar vis-a-vis major currencies, and, therefore, are not aected by the relation between individual country's main export price and its exchange rate. The triple interaction associated with the natural hedge is then instrumented by the interaction of the correlations in each of these three countries and the product of a country's exchange rate volatility and a commodity's price volatility. These IV regressions were only conducted for the global trade share specication (Eq. [7]) because the instruments capture the correlations resulting from global uctuations of major currencies against the dollar and cannot explain the bilateral dimension of the correlations. In any case, as discussed above, the reverse causality argument does not clearly apply to bilateral trade shares.

The results yield supportive evidence for the presence of a causal link between natural hedge and export composition. The coecient for the interaction of correlation and exchange rate volatility is negative, statistically signicant, and an order of magnitude larger than those reported in Table 3. The instruments are valid according to the Hansen J-statistic (see the p-value of this test at the bottom of the table) and they are not weak: the F statistic of the rst stage regression is 55, and the hypothesis that the actual size of the nominal 5 percent test is larger than 5 percent is rejected based on the Kleibergen and Paap (2006) LM statistic and the Stock and Yogo (2002) empirical distribution for the Cragg-Donald statistic. Similar results are obtained for the regression including the factor endowments, although the coecients for the factor endowment are similar to those obtained by OLS. Interestingly, the coecient for the variance of real commodity price is now negative and signicant.

These results, and the discussion above on the role of measurement error and the use of annual moments instead of within-year ones, indicate that the true relevance of natural hedge for the composition of exports may be signicantly higher than that obtained in the baseline OLS estimation, and that the OLS coecient could be considered a lower bound on the true importance of natural hedge. This reinforces the view that the mechanism is quantitatively relevant.

Overall, these results indicate that concerns for reverse causality are not behind the qualitative ndings of the paper. Together with the evidence on growth rates that is not mechanically aected

> 9Of course, the global shares concept cannot be replicated at the bilateral level.

20