Table 4 Calibration of the model

||Panel a: Fixed parameters<br>||Pa<br>|nel b: Calibrated paramete<br>|rs<br>|
|---|---|---|---|---|---|
|Param.|Description|Value|Param.|Description|Value|
|_γ_|Risk aversion|2_._00|_β_|Discount rate|0_._949|
|_r_|Risk-free interest rate|0_._01| ̄_d_0|Default cost—level|_−_0_._24|
|_λ_|Debt maturity|0_._05| ̄_d_1|Default cost—curvature|0_._29|
|_z_|Debt services|0_._03|_κ_0|Slope parameter|60_._0|
|_θ_|Reentry probability|0_._0385| ̄<br>_A_|Active investors demand|0_._526|
|_ρ_y|Output, autocorrelation|0_._93||||
|_σ_y|Output, shock volatility|0_._02||||
|_τ _<sup>_⋆_</sup>|Share of passive demand|0_._123||||
|_ρτ_|FIR, autocorrelation|0_._66||||
|_ητ_|FIR, shock volatility|0_._02||||

default risk (i.e., with a larger return variance). Note that when _B_<sup>_′_</sup> _−T_<sup>_′_</sup> _− A ≥_<sup> ̄</sup> 0, Ψ( _._ ) _≤_ 1. We thus view Ψ( _._ ) as an “inconvenience” yield, that is, a premium demanded by investors as compensation for holding the bond, in excess of its default risk.<sup>27</sup> Table 4 lists the calibrated parameters. For the subset of fixed parameters (Panel a), we set _γ_ = 2, which is a standard value for risk aversion in the literature. We also set a quarterly risk-free rate of _rf_ = 0 _._ 01, in line with the average real risk-free rate observed in the United States. The probability of re-entering international markets is set to _θ_ = 0 _._ 0385, implying an average exclusion duration of 6.5 years. We set _λ_ = 0 _._ 05 to target a debt maturity of 5 years and _ν_ = 0 _._ 03 to match Argentina’s average debt services. The parameters for the endowment process, _ρy_ and _σy_ , are based on log-linearly detrended quarterly real GDP data of Argentina. All these parameters are taken from Morelli and Moretti (2023). Last, we set _τ_<sup>_⋆_</sup> to match the average share of Argentina’s external debt tracked by passive investors, and calibrate _ρτ_ and _στ_ to match the persistence and volatility of our FIR measure.

We internally calibrate the remaining parameters (Table 4, Panel b). We jointly calibrate the default cost level and curvature, _{d_ 0 _, d_ 1 _}_ , together with the government’s discount factor _β_ , to target Argentina’s average ratio of (external) debt to GDP, average spread, and volatility of spreads.<sup>28</sup> Additionally, we calibrate _κ_ 0 to match the estimated (inverse) reduced-form ˆ demand elasticity, _η_ = _−_ 0 _._ 33. Last, we set _A_<sup> ̄</sup> to match the average holdings of active investors. That is, _A_<sup> ̄</sup> = _B_<sup> ̄</sup> _− T_<sup> ̄</sup> , where _B_<sup> ̄</sup> denotes the average debt stock and _T_<sup> ̄</sup> denotes passive investors’

> 27For low values of _B′_ , when _B′ −T ′ − A_  ̄ _<_ 0, Ψ( _._ ) _≥_ 1. However, when _B_<sup>_′_</sup> is small, the variance of the repayment function tends to be small (due to the low default risk), and hence Ψ( _._ ) is typically close to one in these cases.

> 4

> 28Annualized spreads are computed as _SP_ = 1+ _i_ 1+( _y,τ,Brf_<sup>_′_</sup> <u>)</u> _−_ 1, where _i_ ( _y, τ, B_<sup>_′_</sup> ) is the internal quarterly � � return rate, which is the value of _i_ ( _._ ) that solves _q_ ( _y, τ, B_<sup>_′_</sup> ) = _λ_<sup><u>[</u></sup><sup>_λ_</sup> +<sup><u>+(</u></sup> _i_ ( _y,τ,B_<sup>1</sup><sup>_−λ_</sup><sup><u>)</u></sup><sup>_ν′_</sup> )<sup><u>]</u>.</sup>

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