hot money business definition
Funds that are controlled by investors who seek high short-term yields when the funds are likely to be reinvested somewhere else at any time. Some financial institutions attract hot money by offering above-average yields on certificates of deposit. However, if the rate is lowered, the funds are likely to be lost to another institution or investment.Case Study
Although an improbable target for currency speculators, tiny Iceland (population approximately 300,000) gained fame as a world depository for hot money shortly after the country lifted currency exchange controls in the late 1990s. Funds seeking the krona's high interest rates flooded into the island country from around the world, much of it representing borrowed money obtained in low-interest Japan. The inflows helped produce a booming economy with a strong currency, soaring stock market, and skyrocketing housing prices. The economic boom was accompanied by inflation, causing the central bank to raise interest rates to 11.5% by mid-2006. The increase in interest rates also resulted from the government's concern that hot money would begin flowing back out of Iceland as interest rates started rising in Europe, Japan, and the United States. A rapid outflow of hot money would depress the country's currency, increase the cost of imported goods, and cause a downward spiral in asset values.
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