The intervention of the Central Bank into the foreign exchange market is invariably undertaken based on policy objective considerations, and the influence that is brought to bear by such intervention is often far too significant to be ignored. This paper sets out to establish a model of optimal Central Bank behavior, under policy objective considerations, in an attempt to explain the determination of the New Taiwan Dollar exchange rate. Our empirical study finds that the comparative prices and interest differences between domestic and foreign countries, and the exchange rate trends within neighboring countries such as Japan and South Korea, play significant roles in influencing the exchange rate trend of the New Taiwan Dollar. In addition to the market mechanism, major policy considerations, such as domestic price stabilization, stimulation of the economy and exchange rate stabilization, have driven the Central Bank to undertake significant intervention into the market. Other comparative empirical studies have shown that a model which includes government intervention is far better, both in terms of explanatory power and forecasting power, than a model which excludes government intervention.