This paper constructs a portfolio model with central bank's intervention to study the effects of the deregulation of capital control on the exchange rate determination and the policies' influence. In addition, the role of foreign intervention in the process of financial liberalization is reviewed. Main conclusions are: theoretically, the effects of domestic credit expansion and the increase of bonds on exchange rates are positive; the increasing capital mobility strengthens the effects of monetary expansion while such change may increase or decrease the effects of bond expansion depending on the behavior of foreign intervention. Second, the empirical evidence shows that during the period from September 1985 to September 1996, the case of Taiwan is quite consistent with theoretical investigation. However, the decreasing influence from bond expansion indicates that our central bank's intervention in the foreign exchange market is quite substantial.