# Hot Money Arena A live two-country sandbox for international macro. Set policy rates, watch capital particles flow, see Dornbusch overshooting resolve, and trigger the Mundell–Fleming trilemma. Canonical URL: https://exclam.ai/visuals/hot-money-simulator/ Live macro arena Deflationary shock · HomeInflationary boom · HomeRun full cyclePauseReset Current scene Home Peak Late-cycle. Output above potential. Inflation pressure building. CB tight, watching for cracks. Foreign Recovery Easing cycle still working through the system. Output gap closing from below trend. Inflation soft. Therefore The rate differential is +4.50%, pulling capital into Home. Watch the FX path and carry P&L below; the simulation is running. Home country Peak Policy 5.50% Real 1.90% Gap +2.0% CB tight · curve flat / inverted · carry trades crowded · FX overshooting Recoveryr 1.0% · π 1.0% · gap -1.5%Expansionr 3.0% · π 2.4% · gap +0.5%Peakr 5.5% · π 3.6% · gap +2.0%Contractionr 3.0% · π 2.0% · gap -0.5% Fine-tune Policy rate5.50%Expected inflation3.60%Output gap+2.00% Foreign country Recovery Policy 1.00% Real 0.00% Gap -1.5% CB cutting · curve steep · capital pushed out to higher-yielding markets Recoveryr 1.0% · π 1.0% · gap -1.5%Expansionr 3.0% · π 2.4% · gap +0.5%Peakr 5.5% · π 3.6% · gap +2.0%Contractionr 3.0% · π 2.0% · gap -0.5% Fine-tune Policy rate1.00%Expected inflation1.00%Output gap-1.50% Rate diff (Home − Foreign) +4.50% Real rate diff +1.90% FX · overshoot vs eq 0.8200 (+0.00%) · Home stronger Capital flow direction Capital → Home ## Capital flow arena Each particle is hot money in motion. Flow direction follows the rate differential; density scales with the magnitude. Country rings reflect the current cycle phase. Inflow to Home Outflow from Home Fullscreen Figure: Capital flow particle simulator ### Exchange rate over time Home currency per Foreign unit · lower = stronger Home Actual 1.0000 Equilibrium 1.0000 Figure: FX history with overshooting ### Carry P&L · long Home / short Foreign Rate-diff accrual + FX MTM. Cumulative +0.00% Figure: Carry trade cumulative return ### Dornbusch phase detector Move a slider or pick a phase. Detector identifies which Dornbusch stage you are in. Regime · Mundell–Fleming trilemma Float + open capital Keeps: Capital · Monetary policy Sacrifices: Floating exchange rate Peg + capital controls Keeps: Fixed FX · Monetary policy Sacrifices: Closed capital account Peg + open capital Keeps: Capital · Fixed FX Sacrifices: No independent monetary policy Closed island Keeps: Fixed FX · Monetary policy Sacrifices: No cross-border investment ## What to try ### Home: Peak · Foreign: Recovery Your current scene. CB tight · curve flat / inverted · carry trades crowded · FX overshooting. Foreign is recovery — cb cutting · curve steep · capital pushed out to higher-yielding markets. ### Cycle Home through all four phases Use the phase chips on the Home card or the 'Run full cycle' button. Watch FX overshoot, retrace, and flip as the rate diff crosses zero. ### Hike Home by 200 bp Watch the FX line jump (overshoot) and then decay back toward the new equilibrium. The faster you change the rate, the bigger the visible overshoot. ### Cross the parity line Move the Home rate above and below Foreign. The particle flow reverses direction and color. This is the entire pull/push mechanic in one moment. ### Try peg + open capital Switch regime to 'Peg + open capital' and set Home rate ≠ Foreign rate. The simulator fires the Mundell–Fleming warning. ### Watch the carry P&L The chart is the running P&L of a long-Home / short-Foreign carry position with FX adjustment. Flip the rate sign and watch the line go negative — that is the carry unwind. ## Simulator FAQ How is the exchange rate modeled? The long-run equilibrium FX is a linear function of the rate differential. When the differential changes, the equilibrium jumps. The "actual" FX overshoots that equilibrium and then exponentially decays back toward it. This is a simplified Dornbusch overshooting model. Why do the particles change color and direction when I cross the parity line? Particles represent hot money flow. They emit from the lower-rate country and travel toward the higher-rate country. Above parity, money is pulled into Home; below parity, money is pushed out. The color (green vs. rose) makes the direction obvious. When does the trilemma warning fire? The simulator fires when the active regime is "peg + open capital" and the user tries to set a Home rate different from the Foreign rate. In that combination, the central bank cannot independently set the policy rate without breaking the peg — that is the Mundell–Fleming impossible trinity. How is the carry-trade P&L computed? It tracks a fixed "long Home, short Foreign" position. Each tick adds (rdHome − rfForeign) prorated for time, plus a mark-to-market on the Home currency. When Home becomes the lower-yielder, both legs turn against you. That is the textbook carry-unwind risk. What do the cycle phase chips represent? Each country starts in a business-cycle phase. Click a chip to load a typical macro profile (policy rate, expected inflation, output gap). Fine-tune from there using the sliders. The phase chip stays put even if you adjust manually — it represents the scene you are studying. A live model of the international-macro chain · cycle → policy → rate diff → capital flow → FX. [Read the summary](https://exclam.ai/visuals/economic-cycle-hot-money/index.md)