1. Preheat oven to 350 degrees F.
2. Using hand or stand mixer, cream butter until light and fluffy. Add vanilla. With mixer running, gradually add in powdered sugar. Add in flour, 1/2 cup at a time, until just combined.
3. Wrap dough in plastic wrap and refrigerate for at least 1 hour.
4. In a heavy bottom saucepan, combine cranberries, water, and sugar. Stir to combine. Over medium heat, bring mixture to a boil. Once cranberries begin to pop and open, lower heat and stir constantly for 5 minutes or until filling reaches until thickened and coats the back of the spoon. Remove from heat, and pour cranberry mixture into bowl and allow filling to cool completely.
5. Remove cookie dough from refrigerator and roll out to 1/4-inch thickness on a surface dusted with powdered sugar. Using 2-inch square cookie cutters, cut out cookies. If dough gets too soft, return to refrigerator for 15 to 30 minutes.
6. Place cookies on ungreased baking sheet. Spoon a teaspoon of filling into the center of the cookie. Lift the four corners of the cookie to the center and pinch closed. Bake for 10 to 12 minutes or until edges of cookies just begin to turn golden brown.
7. Remove from oven and place on a cooling rack. When cooled, dust cookies with additional powdered sugar.