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Economics

Student Videos

Hot Money

Level:
A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

In this revision video, we cover an important concept in the global financial system – namely inflows and outflows of hot money

Hot money is money (or financial capital) that flows freely and quickly around the world looking to earn the best rate of return.

Hot money might be invested in any financial asset whose value is expected to rise such as property or shares, or simply saved in commercial bank accounts of a currency offering the best post-tax rate of interest.

Hot Money

Why can hot money be significant for a country’s economy?

  1. May help a central bank to influence a currency in a managed floating system
  2. Inflows of hot money (portfolio capital) can provide commercial banks with extra funds to lend to finance business investment
  3. Hot money flows can create excess liquidity in the economy perhaps causing a future asset boom (including share price bubbles)
  4. Hot money tends to be volatile – (1) they can amplify exchange rate movements which then impacts on components of AD including exports (2) they can move out of a country quickly too (“cold money!)

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