This paper examines the relationship between monetary policy and asset
prices in the context of empirical policy rules. We begin our analysis by establishing
the forecasting ability of house and stock price changes with respect to future
aggregate demand. We then report estimates of monetary policy reaction functions for
the United Kingdom over the period 1992-2003. We find that UK policymakers
appear to take into account the effect of asset price inflation when setting interest rates
with a higher weight being assigned to property market fluctuations. Asset inflationaugmented
rules describe more accurately actual policy, and the results are robust to
modelling the effect of the Bank of England independence