Hot money or hot money

economic-dictionary

Hot money or hot money is one that moves or moves quickly between countries in the financial markets in the search to obtain the maximum benefits in short-term interest rates.

The reason that motivates this movement of liquid capital is the difference between the level of the interest rate of one country and another. Therefore, it is that this money moves quickly and continuously between different countries.

What really happens is that when an economy maintains a favorable level of interest rate in relation to the exterior, this economy will attract capital from other countries. The problem with this attraction of liquid capital from other countries is that, generally, once the economic situation changes, such capitals migrate to other economies that will report higher profits.

This capital is usually so volatile that only enough for investors to hear about certain news of currency depreciation for this capital to fly from one country to another. It should be noted that many analysts and economists refer to this movement of capital as speculative capital flow. They call it that, because what this capital actually does is seek temporary advantages in the prices of the various currencies of the different countries.

Characteristics of hot money or hot money

We are going to mention the characteristics of this type of mobility capital in the financial markets between the different countries:

  • Some call it speculative capital.
  • It is intended to exclusively pursue maximum financial profitability.
  • It is focused on the short term.
  • It moves towards high interest rate economies.

Consequences of hot money or hot money

The consequences of this transfer of liquid capital is that it fundamentally affects two variables of a country's economy. It directly affects the exchange rate and the balance of payments.

The balance of payments is affected in the sense that it can, in view of the entry of this volatile capital, allow it not to show a deficit. A strong inflow or outflow of this capital is enough for the balance of payments to become unbalanced. Dragging with it a currency crisis in the country.

With regard to the currency, the entry of speculative capital can cause the country's currency to report strong appreciations.

One of the best measures in countries that are affected by sudden movements of these funds is to set a minimum time for foreign investments.

Tags:  passes Spain Argentina 

Interesting Articles

add