Abstract: The inflation target is the crucial variable when the central bank formulates monetary policies. In recent years, the major developed countries maintain a low rate of inflation when injecting massive money into the economy, which challenges the effectiveness of monetary policy: The traditional inflation target measured by price index is not only incapable of accommodating the new changes of consumer expenditures at the stage of high-quality development, but also unable to capture the influence of the asset prices and the prices of investment goods on the price perception of residents, which cannot been ignored at present. By constructing a general equilibrium model with the credit constraints, this paper introduces asset price bubbles that can be pledged into the inflation target and examines the effectiveness of monetary policy regulations on the macro economy. The results show that although asset bubble fluctuations can restrain household consumption, it leads the fund to flow into the production sectors, booming the production of the real economy. The monetary policy taking asset prices into considerations in the inflation target can smooth the bubble fluctuations and stabilize economy. When the asset prices are considered, the consumption restraints caused by bubble fluctuations will be reduced, thus social welfare will be improved. Therefore, the adjustment of macroeconomic policies should lay emphasis on the true reflections of asset prices on inflation level, stabilize market expectations under specific situations, and flexibly lead the economy to develop in a stable and healthy way.

Key words: asset prices, monetary policy, inflation target, credit constraints, bubble shock