The purpose of this research is to investigate the channels through which the monetary policy affects the real economy with the role of asset markets explicit in the model. There are two channels through which the monetary policy affects the real economy. One is a traditional channel and change in the monetary policy is conveyed through interest rates (monetary channel). The other is by affecting the availability of credit to firms and consumers ( credit channel) In the latter channel the asset prices play a vital role since the monetary policy directly affects the collateral value and/or cash flow, which in turn has a significant effect on investment and consumption. We pinpoint which channel is working in Japan and the United States. Given the knowledge of the channel~ through which the monetary policy affects the real economy, we explore the optimal monetary policy to stabilize the economy with special attention to the policy coordination between the two countries.