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To evaluate the effectiveness of targeting monetary policy strategies in a small open economy, we develop a dynamic optimizing model calibrated to recent Korean data. We then explore the conse-quences of alternative specifications of the loss function for society and the central bank, with par-ticular focus on exchange rate volatility. Policy simulations include variations on inflation targeting, nominal income growth targeting and exchange rate targeting. Our results indicate that inflation targeting remains the most preferred policy regime, even when an explicit motive for exchange rate smoothing is introduced. In this case, the optimal inflation targeting and nominal income growth tar-geting policies are characterized by a “conservative ” central bank that places greater weight on both the primary target variable and on the exchange rate than in society’s objective function. However, the optimal policy reacts to changes in certain parameter values,most notably the degree of exchange rate pass-though, in a large and non-linear fashion, complicating the robustness of inflation targeting recommendations for emerging markets