Inflation targeting monetary policy has introduced in some advanced countries such as UK, New Zealand, Canada and Sweden in the 1990s. Korea adopted Inflation targeting monetary policy in 1998, as well. And there have been many discussions and arguments on the effectiveness and appropriateness of inflation targeting as well as nominal income targeting, exchange rate targeting and hybird targeting.

This paper investigates the effectiveness and optimality of targeting monetary policy. It sets up a small open economy and estimates a sort of interest rule following Taylor rule using quarterly data from 1987.1Q to 2000:1Q, and compares degree of target misses of various targeting policies from simulated data and checks the volatility of economic variables in the model economy, in order to evaluate different targeting regime.

one conclusion from simulations is that inflation targeting performs better than nominal income targeting, exchange rate targeting or hybrid targeting in terms of the variability of major economic variables. The economy under the inflation targeting regime shows more stable movements of inflation rate and economic growth rate.