Institute of Transportation, MOTC

　　In this paper, we follow the new open economy macroeconomics model setup of Obstfeld and Rogoff (1995), using the extended model of Devereux and Engel(1998) to investigate how transportation costs, pricing behavior, home bias, and capital mobility affect the consumption volatility under alternative exchange rate regimes for a country facing foreign monetary shocks. The following conclusions were made according to theoretical derivation: when transportation costs and capital mobility are higher, or home bias is smaller, the results show that the higher consumption volatility under a floating exchange rate regime with producer currency pricing and foreign currency standard, then the effect of insulation from foreign monetary disturbances is weak under a floating exchange rate.