In a neural model of olfactory bulb processing, we demonstrate the putative role of the modulation of two types of inhibition, inspired by electrophysiological data on the effect of acetylcholine and noradrenaline on olfactory bulb synaptic transmission. Feedback regulation of modulation based on bulbar activity serves to 'normalize' the activity of output neurons in response to different levels of input activities. This mechanism also decreases the overlap between pairs of output patterns (Mitral cell activities), enhancing the discrimination between overlapping olfactory input patterns. The effect of the modulation at the two levels of interneurons is complementary: while an increase in periglomerular inhibition decreases the number of responding output neurons, a decrease in granule cell inhibition increases the firing frequencies of these neurons.