Empirical verification of the principle of effective market classificationin terms of the CR

Monetary and fiscal policy should be paired with the economic objectives th ey most affect. That is the main idea of Mundell's principle of effective m arket classification. This paper considers whether this principle is fulfil led in the Czech economy. Mundell's traditional principle has been modified to meet the features of the Czech economy - a small, open economy with a c ontrolled floating exchange rate system and a high inflow of foreign direct investment. Empirical verification confirmed the need to modify the policy mix in the Czech Republic (e.g., the negative slope of the external-balanc e curve turned positive, which led to a cobweb model of a dynamic re-establ ishing process). Application of this modified model yielded the following r ecommendation for the Czech economic policy mix: monetary policy should con trol the external balance and fiscal policy should control the internal bal ance.