Hot money refers to capital that is regularly moved between financial markets and economies to benefit from the highest available short-term interest rates. Banks attract hot money by offering short-term certificates of deposit with above-average rates, and investors quickly move their funds if a rival financial institution offers higher rates. These financial transfers can impact exchange rates and a country's balance of payments.

 

While hot money can benefit economies by providing short-term financing for investment and development, it can also lead to market instability. The Chinese economy is an example of a hot money market that turned cold following investor flight. The rapid outflow of capital destabilized China's economy, leading to a drop in the value of the yuan and the implementation of strict capital controls.

 

Hot money can also refer to stolen money that has been marked for identification. Law enforcement and banking regulatory circles use this term to describe money that has been stolen and can be traced back to its original owner.

 

In a global context, hot money flows between economies once trade barriers are removed and sophisticated financial infrastructures are established. High-growth areas that offer the potential for outsized returns attract hot money, while underperforming countries and economic sectors experience outflows of hot money.

 

Hot money can have both positive and negative effects on an economy. While it can provide short-term financing for investment and development, it can also lead to market instability if there is a sudden outflow of capital. To mitigate the risks associated with hot money, countries can implement capital controls to limit the movement of funds in and out of their economies.

 

In conclusion, hot money is capital that moves regularly between economies and financial markets to benefit from the highest available short-term interest rates. While it can provide short-term financing for investment and development, it can also lead to market instability. Countries can implement capital controls to limit the movement of funds in and out of their economies to mitigate the risks associated with hot money.