rates and exchange rate changes in this framework. In conjunction with other lines of research on exchange rate determination at the beginning of the recent float Dornbusch (1975) also develops a portfolio balance model to investigate the effects of macroeconomic policies. Three applications of the model is deliberated that in open market operations; that in assessing the effects of currency depreciation; and that in investigating the effects of a particular form of taxation, a tax on lending abroad, which affects asset choices and thereby the equilibrium position of the economy as well as the balance of payments and its composition. This taxation is in contrast to that in McKinnon (1969) where it is a means of applying a kind of
fiscal policy to regulate budget surpluses or deficits Nevertheless, unlike in the
Mundell-Fleming model, fiscal policy does not possess an essential position in the
portfolio balance framework as monetary policy Other theoretical research in cludes Masson (1981) who addresses the stability issues of the portfolio balance