Explaining Korea's Lower Investment Levels After the Crisis

This paper examines the reasons for Korea's lower investment levels after the crisis of 1997-98 through estimation of an error correction model of real investment. The econometric results suggest that the fall in investment rates resulted from a decline in the long-run equilibrium value of investment rates due to a deterioration in terms of trade. They also show that recent investment levels are neither too high nor too low relative to the long-run equilibrium value. The variation in terms of trade seems to have pronounced effects on investment through its effect on corporate profits and cash flows in Korea.