KOF working papers // KOF Swiss Economic Institute, ETH Zurich 292
This paper investigates the causal influence of export concentration on measures of aggregate volatility. Geographically disadvantaged countries often have a concentrated export structure which makes them more vulnerable to external shocks. Identifying causal effects of export concentration on volatility faces severe problems of endogeneity, however. Based on a gravity approach, we suggest an inequality decomposition method which allows the construction of an aggregate measure of export concentration where all of its components are determined entirely by countries' geographic characteristics. Since this measure is plausibly uncorrelated with other determinants of volatility, it is used as an instrument for ex-port concentration to obtain instrumental variables estimates of the effect of export concentration on volatility. Results from two-stage least squares instrumental variables regressions reveal that export concentration has a particularly strong effect on volatility in terms of trade and on volatility in export growth rates but we cannot confirm a casual influence on the volatility of exchange rates.