This study empirically examine whether asset prices and exchange rate are acknowledged into a standard framework of interest rate rule, using data for Pakistan since 1991Q4 to 2015Q4. Asset prices and exchange rate can be used as information variables for a standard Taylor type rule or as arguments in an augmented interest rate rule. The empirical evidence, based on measures of the output gap proxy by marginal costs (MC) calculations, implies that monetary policy makers may use asset prices and exchange rates not only as segment of their information set for setting interest rate, but also to set interest rate to balance deviations of asset prices or exchange rates from their counterpoise situations. These results are open to several alternative illustrations. The implication that comes out of this analysis is that central bank incorporates asset prices and exchange rate as goals when real marginal cost is used as a proxy instead of output gap. This implies that central bank try to stabilize these variables in much the same way as they equilibrate or stabilize the inflation and output and the proxy of output gap i.e. real marginal cost. However, central bank has regularly been clear that they do not target asset prices, either they use or not because asset prices are not essentially related to the goals of monetary policy or because they are only imperative insofar as they deliver information about expected inflation. On the other hand, it could be that targeting asset prices are very tough in practice given the struggle of establishing their true equilibrium values. Supervisor:- Dr. Attiya Yasmin Javid