"to take on questionable investments as they search for higher yields in an attempt to bolster their minuscule interest income." Kimball writes that
The often-repeated claim that low interest rates lead to speculation cries out for formal modeling. I don’t see how such a model can work without some combination of investor ignorance and irrationality and fraudulent schemes preying on that ignorance and irrationality.
"Modeled Behavior" blog has a complementary post today, also questioning how "reaching for yield" squares with economic theory. So here is my morning modeling exercise. It is a really simple, partial equilibrium model, but a model nonetheless. I'm not saying it's incredibly realistic, but I wanted to come up with the simplest model of "reaching for yield" I could think of. It has neither investor ignorance, nor irrationality, nor fraudulent schemes.