Should Chinese Monetary Policy Respond To The Real Estate Price Fluctuations?

In this paper, we build an IS-Phillips model of a closed economic environment incombination with the reality of our country national condition. The model describes theinteraction relationship between the main economic variables: the rate of inflation, output gap,real estate prices, interest rates and money supply. The real estate prices in the model not onlyconsider the affect to IS equation through various channels, but also emphasized the role ofendogenous of real estate prices. Based on the hypothesis that purpose of optimal monetarypolicy rule in our country is to minimize the loss function of the central bank, we canrespectively deduce the money supply reaction function of considering and ignoring the estateprices. The loss function is the sum of the squares of the discounted value of inflation and outputfluctuation.Using two-stage least squares method to estimate our theoretical model, we can then get themoney supply response function expression of both considering and ignoring the real estateprices. Then, begin to compare and analysis the optimal money supply prediction with the actualvalue, we can get the following conclusion: both considering the real eatate prices in the moneysupply reaction function and optimal monetary policy under mixed inflation targeting are morein line with the actual economic situation. Therefore, we suggest that when the monetaryauthorities in our country formulate the monetary policy, they should pay more attention to thereal estate prices.