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 (DIT), CPI inflation targeting (CIT), and an exchange rate peg. The authors derive a tractable canonical system in domestic inflation and the output gap, which allows for a detailed analysis of the equilibrium dynamics under different policy regimes. They find that DIT implies higher volatility in nominal and real exchange rates compared to CIT and an exchange rate peg. Additionally, they derive a second-order approximation of the consumer's utility to evaluate the welfare losses associated with suboptimal regimes. The results suggest that DIT can achieve simultaneous stabilization of the output gap and domestic inflation, while both CIT and an exchange rate peg lead to deviations from the optimal response to shocks.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 (DIT), CPI inflation targeting (CIT), and an exchange rate peg. The authors derive a tractable canonical system in domestic inflation and the output gap, which allows for a detailed analysis of the equilibrium dynamics under different policy regimes. They find that DIT implies higher volatility in nominal and real exchange rates compared to CIT and an exchange rate peg. Additionally, they derive a second-order approximation of the consumer's utility to evaluate the welfare losses associated with suboptimal regimes. The results suggest that DIT can achieve simultaneous stabilization of the output gap and domestic inflation, while both CIT and an exchange rate peg lead to deviations from the optimal response to shocks.