Monetary and Fiscal Policy Mix in the Czech Republic

Monetary and fiscal policy should be paired with the economic objectives on which they have the most influence. The authors have applied Mundell's principle of effective market classification (EMC) to the conditions of the Czech economy - a small open economy with a managed floating exchange rate system and a high influx of foreign direct investment. Empirical verification confirmed the requirement of the modification of the EMC principle in the Czech Republic. An application of the modified model in the Czech Republic resulted in the following recommendation for the Czech economic policy mix: monetary policy should control the internal balance and fiscal policy the external balance.