This paper presents a small open economy version of the Calvo sticky price model and analyzes the macroeconomic implications of three alternative monetary policy regimes: domestic inflation targeting, CPI inflation targeting, and an exchange rate peg. The model shows that these regimes differ in the level of exchange rate volatility they entail. Domestic inflation targeting, which aims to stabilize both output and inflation, leads to higher volatility in both nominal and real exchange rates compared to CPI targeting and an exchange rate peg. CPI targeting is shown to be a hybrid regime between domestic inflation targeting and an exchange rate peg. The paper also evaluates the welfare implications of these regimes, showing that domestic inflation targeting is the most efficient in terms of welfare, while CPI targeting and the exchange rate peg lead to deviations from the optimal response to shocks. The analysis highlights the importance of monetary policy in stabilizing the economy and the trade-offs between different policy regimes. The paper concludes that domestic inflation targeting is the optimal policy for a small open economy.This paper presents a small open economy version of the Calvo sticky price model and analyzes the macroeconomic implications of three alternative monetary policy regimes: domestic inflation targeting, CPI inflation targeting, and an exchange rate peg. The model shows that these regimes differ in the level of exchange rate volatility they entail. Domestic inflation targeting, which aims to stabilize both output and inflation, leads to higher volatility in both nominal and real exchange rates compared to CPI targeting and an exchange rate peg. CPI targeting is shown to be a hybrid regime between domestic inflation targeting and an exchange rate peg. The paper also evaluates the welfare implications of these regimes, showing that domestic inflation targeting is the most efficient in terms of welfare, while CPI targeting and the exchange rate peg lead to deviations from the optimal response to shocks. The analysis highlights the importance of monetary policy in stabilizing the economy and the trade-offs between different policy regimes. The paper concludes that domestic inflation targeting is the optimal policy for a small open economy.