Abstract: Whether the central bank should regulate the formulation of monetary policy against the housing price has been the focus of the researchers, but no consensus has been reached yet. Based on China’s quarterly economic data from 2000 to 2010, this paper performs a comparative test of the applicability of Taylor rule and the standard Taylor rule that is blended in the housing price to the formulation of China’s monetary policy to regulate macro-economy. The empirical results show that the interest rate policy formulated according to the standard Taylor rule can lower the value of the central bank’s loss function and raise the effectiveness of interest rate policy. This result indicates that under the circumstance of the fluctuation of housing prices not affecting the stability of commodity prices and economic growth, the central bank should not regulate the housing price. In other words, before the central bank is going to perform regulation on the macro-economy by formulating the interest rate policy, it should consider the correlation between the fluctuation of housing prices and inflation and output and judge its potential influence on the policy targets.

Key words: house price; Taylor rule; loss function; interest rate policy