The process of EU integration challenged the accession countries: what is the optimal monetary and exchange rate policy on their path to the EU? There are no prescriptions and different experiences exist. The book provides an empirical investigation and theoretical modelling of monetary policy in Macedonia as a small and open economy in transition and on the path of convergence towards the EU. The book examines the dynamics and the endogeneity of the convergence criteria and finds out evidence for the exchange rate regime shift effect on trade integration and monetary transmission mechanism. Hence, a forward-looking monetary model with rational expectations considering transition aspects is developed and used to investigate the consistency of monetary policy with the accession process to the EU. The model suggests that an alternative to the current (fixed exchange rate) regime in Macedonia is the flexible exchange rate targeting within an overall inflation targeting strategy. We consider this book to help macroeconomic policymakers and central bankers in Central and South Eastern Europe on designing the optimal monetary and exchange rate policy during their integration to the EU.