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The "Sub-prime" crisis, which led to major turbulence in global financial markets beginning in mid-2007, has posed major challenges for monetary policymakers. The authors analyze the impact on monetary policy of the widening differential between policy rates and the 3-month Libor rate, the benchmark for private sector interest rates. They show that the optimal monetary policy rule should include the determinants of this differential, adding an extra layer of complexity to the problems facing policymakers.
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