In most countries, the primary objective of monetary policy is maintaining price stability. For the most part, countries have switched to the strategy of inflation targeting strategy, due to poor performance of other monetary strategies. The benchmark interest rate is a basic instrument of the inflation targeting strategy. The intrest rate represents the main instrument of inflation targeting strategy. Other instruments, including interventions on foreign exchange market, only play a supporting role. The monetary transmission channel of interest rate has significantly limited effect when almost 2/3 of the loans are indexed in foreign currency. For this reason, in Serbia, the exchange rate channel still represents the strongest channel through which inflation is affected. Accordingly, the paper will, according to data collected from secondary sources, analyze different monetary strategies and limitations of monetary policy of central banks in small and open economies. Particular emphasis will be placed on Serbia’s monetary strategy, as a small and open economy that uses inflation targeting as its monetary strategy. Serbia has been exposed to high inflation rates for many years and has used a number of different monetary policy strategies. Nowadays, the National Bank of Serbia is facing relatively stable inflation rates and it can be concluded that inflation targeting is the optimal choice for monetary strategy.