Defining “Hot Money”

Date Sunday, November 9th, 2008

In economics, hot money refers to funds which flow into a country to take advantage of a favourable interest rate, and therefore obtain higher returns. They influence the balance of payments and strengthen the exchange rate of the recipient country while weakening the currency of the country losing the money. These funds are held in currency markets by speculators as opposed to national banks or domestic investors. As such, they are highly volatile and will be shifted to another foreign exchange market when relative interest rates make this more profitable.

100% Capital Protected?
Led to believe that your capital investment was safe? Contact us.
New Business Opportunity
Start a New Energy Saving Business PLC Seeks International Partners
Ads by Google

Hot money is a major factor in capital flight and the ability of developing nations to finance their debt. As large sums of money can move very quickly to take advantage of small fluctuations in interest rates and currency values, countries which have difficulty raising money through the sale of long-term bonds are particularly susceptible to short-term interest rate pressure, particularly during periods of rapid inflation. These types of transactions were largely responsible for the currency crises in Mexico and Asia during the 1990s. See 1994 economic crisis in Mexico and East Asian financial crisis.

In part to reduce the influence of hot money on a nation’s economy, a few nations have minimum time requirements for investment. For example, Chile requires all foreign investments to be put in a one-year-locked account. Although this sort of control reduces investment in a country, it also makes its economy less susceptible to currency flight.

by Jim Yu

One Response to “Defining “Hot Money””

  1. Allison Sellers Says:
    November 22nd, 2008 at 9:15 am

    I am not sure I totally agree with you, but it is well stated. Keep up the good work.

Leave a Reply