Effective Market Classification: Theory and Application in the Czech Economy

Policies should be paired with objectives on which they have the most influence: such is the main idea of Mundell?s principle of effective market classification. This paper examines and discusses whether this principle is fulfilled in the Czech economy. The author deals with the difficulty of achieving internal stability and balance of payments equilibrium. The Czech National Bank ? the central bank ? has targeted net inflation since 1998; the Czech government is focused largely on economic growth. The author criticises this bipolar system, since external stability is not controlled by any single institution. In the theoretical portion of this article, the author solves the problem of the algebraic specification of Mundell's model in dynamic conditions and, also, explains the impact of a change of the external balance definition (current account plus direct investment) and the exchange rate system (floating) on the effective influence of monetary and fiscal policy.