Monetary and fiscal policy mix in the Czech Republic: empirical verification of the principle of effective market classification

Monetary and fiscal policy should be paired with the economic objectives on which they have the most influence. The authors have transformed this traditional Mundell's principle of effective market classification into the conditions of the Czech economy - a small open economy with controlled floating exchange rate system and high inflow of foreign direct investment. An empirical verification confirmed the requirement of the modification of this principle in the CR. An application of the modified model in the CR resulted in the following recommendation for the Czech economic policy mix: monetary policy should control the external balance and fiscal policy the internal balance.

Keywords: monetary policy, fiscal policy, balance of payments, principle of effective market classification