The paper explores how inflation targeting affects a small open economy with imperfect competition and price rigidity. It finds that the impact of inflation targeting on output and inflation volatility depends on the exchange rate regime and the type of inflation being targeted. Flexible exchange rates are better for real shocks, while managed exchange rates are better for nominal shocks. Targeting domestically generated inflation is more stabilizing than targeting CPI inflation. Flexible inflation targeting is more beneficial than strict inflation targeting for overall welfare.