Inflation targeting has moved the quality of econometric methodology and practice into the limelight of economic policy debate. This book describes how the discipline has adapted to changing demands by adopting new insights from economic theory and by taking advantage of the methodological and conceptual advances within time series econometrics. The authors interpret and evaluate the last forty years of international research to explain inflation in a small open economy. A dynamic incomplete competition model is evaluated and built into a small econometric model to analyse the transmission mechanism, to evaluate monetary policy rules, and to explore the main sources of forecast failure.