Lee, Seung-Myung

Abstract
The Korean economy has been plagued by the phenomenon of the short-term floating of funds in recent years. It looks like it has become a stylized fact, bringing about many negative results on the nation’s economy with virtually no positive effects. What has caused the short-term floating of funds to prevail over the years? There was lingering concern over economic uncertainty and corporate credit risk in the domestic financial markets. Extremely low interest rates are also partly blamed for the prevalence of short-term floating funds. External factors away from the financial markets are also crucial because they are associated with market uncertainty with lots of negative implications. The rise in the level of short-term floating funds breaks down the normal circular flow of funds that helps ensure steady economic growth because money circulates only within the financial system, but does not flow into the real economy for production and future investment purposes. The downside of the short-term floating of funds is that it has been the main cause of the credit crunch, financial market polarization, and economic instability haunting the Korean economy for the past several years. The fundamental way to cope with the short-term floating of funds along with financial market polarization is to reduce the uncertainty surrounding the financial markets. The policy objectives should focus on market measures to transform floating short-term funds into long-term investment funds for industrial production by restoring the normal functioning of the financial markets.
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