Abstract
[enter Abstract Body]A rapid macroeconomic turnaround and lingering financial market uncertainties in Korea are seen as conflicting but consistent indicators of the fundamental weakness in financial markets. Drastic changes in firms’ financing strategy, volatile capital movements, and loose financial supervision also reflect problems of applying macro measures when market functions are not fully normalized. Given the increasing importance of robust financial sector and the limited role of banking sector in maturity transformation, the missing link for economic efficiency and financial stability is seen as the absence of long-term capital market. Heavier reliance on poorly supervised capital markets in the wake of crisis accentuated business cycle and led to complacency that thwarted institutional reform. Future macro policy needs to be pursued with special considerations for promoting deeper and broader financial markets. Poor risk evaluations and currency and maturity mismatch problems need to be resolved by strengthening market mechanism. And a form of flexible inflation targeting is seen as a proper choice for coordinating conflicting objectives within a time consistent framework for securing suitable environment for financial market development.
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