| Abstract | In his paper, we build a backward-looking model and derive both the optimal interest rate rules and money supply rules including house prices. The derived interest rate rules can accommodate Taylor rule and the view of whether monetary policy should respond to house prices directly or indirectly. The proper monetary policy index and identification method reduces the endogeneity of monetary policy, so the empirical results are much reliable without the "price puzzle", which are consistent with theory and the practice of monetary policy and macroeconomic performance. If monetary policy responds to the fluctuation of house prices indirectly, it will be helpful to maintain the continuity of policy and stability of real economic. Moreover, by fully employing both the past and current information from house price fluctuation, contractional monetary policies might have a better effect to keep macro-economic situations under control; On the contrary, it might be better to take expansionary monetary policies to stimulate economy. By contrast, the central bank reacts to the volatility of inflation and output less sufficiently through interest rate, while more sufficiently through money supply. |