Effective market classification: Theory and application in the Czech economy

Policies should be paired with objectives on which they have the most influ ence: such is the main idea of Mundell's principle of effective market clas sification. This paper examines and discusses whether this principle is ful filled in the Czech economy. The author deals with the difficulty of achiev ing internal stability and balance of payments equilibrium. The Czech Natio nal Bank - the central bank - has targeted net inflation since 1998; the Cz ech government is focused largely on economic growth. The author criticises this bipolar system, since external stability is not controlled by any sin gle institution. In the theoretical portion of this article, the author sol ves the problem of the algebraic specification of Mundell's model in dynami c conditions and, also, explains the impact of a change of the external bal ance definition (current account plus direct investment) and the exchange r ate system (floating) on the effective influence of monetary and fiscal pol icy.