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Repositório FGV de Conferências

FGV Conferences, 31º Meeting of the Brazilian Econometric Society

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Interest Rates and Default in Unsecured Loan Markets
José Angelo Divino, Edna Souza Lima, Jaime Orrillo

Last modified: 05-10-2009

Abstract


This paper investigates how interest rates affect the probability of default (PD) in a general equilibrium incomplete market economy. We show that the PD depends positively on the loan interest rate and negatively on the economy's basic interest rate. Empirically, this finding is confirmed by estimation of the Cox proportional hazard model with time-varying covariates using a sample of 445,889 individual contracts from a large Brazilian bank. Among the controls are macroeconomic variables and specific characteristics of the contract and borrowers. A lower basic interest rate, implied by easing monetary policy, leads banks to lend for riskier borrowers, increasing the PD.