autoregressive term, and the residuals from this regression were used as a measure of the
unexpected annual changes in relative supply (RS).19 Alpha was calculated as the total tax
rebates redeemed in year t divided by the total pounds of coffee exported in year t.20 Alpha
measures the average unit rebate in US$ per pound. Monetary values were deflated using the US
PPI. Annual data were used for 1960-1991, 5 years prior to implementation of the rebates and 3
years after their end.
In early regressions, the coefficients on relative supply were insignificant and there were
unusually large residuals in 1977 (positive) and 1979 (negative). In 1977, Brazil had a year of
unusually low Brazilian rainfall and the measure of relative supply apparently did not fully
capture the effect of the resulting supply decline. I was uncertain what caused the residual in
1979, but applied dummies to each year. Their inclusion improved the significance of the
relative supply variable and did not substantially change the magnitude or significance of any
other coefficient. Further, since I expected that the effect of the export tax rebates would differ
by period, I utilized dummies for the years 1965-71 and 1972-79 interacting with Alpha to test
whether this was true. Thus, the OLS regression utilized was Equation 6).
6) PSANTOS4 = β0 + β1Alpha + β2Alpha*D1965-71 + β3Alpha*D1972-79 + β4PCOMPETITOR + β5RS +
D1977 + D1979 + ε.
The coefficient β1 thus refers to the effect of export tax rebates during the period that is not
covered by the interactive dummies, i.e., 1980-88.21 The null hypothesis is 0 < β1 < 1. By the
19 The same relative supply variable was used in both regressions. I tried forming alternative relative supply
variables linking MAMS to exports of Colombia only and OMILDS to exports of other Latin American countries
only. These specifications produced highly similar results for the estimates of β2.
20 The denominator is the exports of coffee to the member market when a quota was in effect and total exports
when a quota was not in effect. Non-member importers may also have received avisos, but it is thought that these
were few. Exports to non-member importers accounted for about 10% of total exports when the quota was in effect.
21 The quota lapsed from late 1986 to late 1987. I included an interactive dummy for 1987; its estimated coefficient
was negative, as expected, but not significant. Since a relatively small number of avisos were issued in 1988 and
17