"This article examines the monetary policy framework put in place by the Bank of Slovenia before the introduction of the Euro. To cope with the increase in inflation, coupled with a weakened external position in 1999, BoS implemented a policy strategy that could be best described as inflation targeting within a managed float regime, with a disinflation trend and price stability objective later providing a nominal anchor for the economy. Quite uniquely, interest rate setting was complemented by an exchange rate policy guided by uncovered interest parity, aiming at maintaining the external position of the economy in equilibrium. We find a strong interest rate transmission while the inflation response to demand, price, exchange rate and credit shocks is found to be highly persistent in the case of no restrictive policy reaction. We also show that the sharp increase in real interest rates after 2000 strongly contributed to a resumption of the disinflation trend in 2001, while the contribution of the exchange rate was roughly neutral up to 2004. A moderately negative output-gap, oil price decreases and lower inflation expectations also contributed to a disinflation trend, which was characterised by high macroeconomic stability "

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