Based on the framework of New Open Economy Macroeconomics, this paper extends the model setup of Devereux and Engel (1998) to investigate how capital mobility, price setting, and imperfectly competitive market structure affect consumption volatility, expected level of consumption, and the welfare performance under alternative exchange rate regimes for a country facing foreign monetary shocks, and analyzes the question of the choice of exchange rate regimes. According to theoretical analysis and simulation results, the following conclusions were made. Firstly, pricing to market (PTM) model has the lowest variance of domestic consumption, and the variance of domestic consumption with producer-currency pricing (PCP) model depends on the degree of capital mobility and the country size. Secondly, the fixed exchange rate will dominate floating exchange rate in terms of the expected level of consumption. Finally, from the perspective of welfare performance, fixed exchange rate is preferable to floating exchange rate with the lower degree of capital mobility or the greater monopoly power of labor market.
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