Another important characteristic of smaller countries is that they have a more concentrated production structure and exports, often in basic commodities. We control for this possibility by including in our regression a dummy variable identifying commodity exporting countries. We define a country to be a commodity exporter if the average share of its exports of agricultural raw materials, food, fuel, ores and metals in total merchandise exports exceeds 61%, which is the cross-country average in our sample.

Lastly, a number of small economies around the world have opted for fixed exchange rate regimes. With a limited number of stabilization instruments, smaller economies may experience more volatile business cycles. Therefore, we control for the presence of a fixed exchange rate regime by including a dummy variable identifying those countries that fix or actively manage their exchange rates. The data on exchange rate regimes is from the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREARE). Based on this classification, we assigned a country to have a fixed or managed exchange rate (fixed ER dummy=1) if it did not fall into freely floating or feely falling category. We find that in our sample of countries, the probability of falling into fixed exchange rate category is higher for smaller countries, equal to 92% (when smallness is based on 1.5 million population threshold), as opposed to 77% for large countries. We also consider a stricter definition of the fixed exchange rate regime, where a country is considered to have a fixed exchange rate regime only if it has had no separate legal tender; or has followed a pre-announced peg or currency board arrangement; or pre-announced horizontal band that is narrower than or equal to +/- 2%; or de facto peg. These practices too are more common in small countries, with the probability equal to 55%. The corresponding probability in large countries is 7%. These robustness results are presented in appendix E and are generally very similar to our benchmark findings.

Column (iii) of Table **3** reports the coefficient on the size variable in the regressions of macroeconomic volatilities on country size (measured by (log) population), development level dummy, time-average ICRG index, dummy for the presence of fiscal rule(s), as well as commodity exporter dummy, fixed exchange rate regime dummy, and a set of regional dummies. Detailed regression results are available in Table A9 in the appendix.

It is easy to see that the signs and significance of the estimated country size coefficient generally survive the inclusion of additional controls. It remains to be the case that smaller countries experience higher volatility of GDP, GNI, trade balance, current account, and aggregate investment. In addition, country size also has a significant negative effect on the volatility of government consumption, as smaller countries are characterized by higher volatility of this variable.

Country size only loses its significant positive effect on the volatility of inflation and imports. This effect, instead, is picked up by the other controls. For instance, countries with higher institutional quality and fixed exchange rates tend to have lower inflation volatility, on average. Countries with fiscal rule(s) in place, instead, exhibit higher inflation volatility. This result likely reflects the endogenous nature of fiscal rules adoption as countries with higher or more volatile inflation may opt for fiscal rules to anchor inflationary expectations.

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