||**I**|**III**|**V**|
|---|---|---|---|
||**Merchandise**|**Traditional**<br>**Services**|**Modern**<br>**Services**|
|Log Per Capita Income, Lag|-0.03|-0.03|0.02|
||[1.09]|[1.38]|[0.35]|
|RER, percent change|0.07|0.05|0.05|
||[0.94]|[0.95]|[0.75]|
|RER* depreciation dummy|0.12|0.15**|0.28**|
||[1.19]|[2.02]|[2.28]|
|Country Fixed Effects|Yes|Yes|Yes|
|Time Fixed Effects|Yes|Yes|Yes|
|Observations|380|380|380|
|Number of Countries|66|66|66|
|R-square|0.31|0.35|0.27|

Note: *, **, *** indicate that coefficients are significant at 10, 5, and 1 per cent levels respectively. The dependent variables are growth in exports of merchandise (Column I), exports of traditional services (Column II) and exports of modern services (Column III), all in constant USD. Observations are averages over five-year periods. Data are from 1980-2009. Regressions include country fixed effects, and time fixed effect, as indicated. Standard errors are robust and clustered at countries. Log per capita income is lagged by one five year period; per cent change in real exchange rate is average of annual values over contemporaneous five years.

As in other analyses of this nature, endogeneity bias cannot be entirely ruled out. Here, however, the fact that in each regression we are working with a relatively small subcomponent of the export basket attenuates the problem.<sup>15</sup> To address the issue of omitted variables, we add a vector of controls, including savings rates, net FDI as a share of GDP, an indicator for Englishspeaking population, a dummy for currency crises, and the years since a country joined the World Trade Organization.<sup>16</sup> We include them by themselves and, in addition, interact them with the real exchange rate. Because some of these variables are time invariant or move slowly, we estimate the specifications with random effects.

When these additional variables are included in the regressions one at a time, only some of them enter significantly. When we include interaction of these other controls with RER, the coefficients of the interaction terms are insignificant; indicating that the effect of RER on exports growth is not conditional on these factors. Details can be found in Appendix B. The important point is that the coefficient on the real exchange rate remains large and significant, as before. Again, as before, the effect of the real exchange rate is larger for modern services (Tables B1B3).<sup>17</sup> A summary of regression results with the inclusion of other controls is in Table 5.

15 To the extent that the bias may still exist, it is likely to be downward, and the coefficient of RER is likely to be underestimated.

16 The explanatory variables, their sources, and summary statistics are enumerated in Appendix A4 and A5. 17 In addition to the results in the Appendix, we included a financial reform index and domestic credit/GDP (as measures of financial sector development); distance from major financial centres; internet penetration; and education in the regressions. The coefficients of these variables are insignificant in all cases. The insignificant coefficient of education for modern services is surprising. We looked for outliers: India seemed to be an outlier with a low average schooling and a high growth of export of modern services. However dropping India does not make much difference.

9