The effectiveness of the Federal Reserve's Maturity Extension Program - Operation Twist 2: the portfolio rebalancing channel and public debt management

Abstract

This paper provides a first assessment of the Federal Reserve’s recent Maturity Extension Program, dubbed Operation Twist 2. Despite the mere exchange of short-term for long-term Treasury securities, the announcement effect is comparable to the second Large Scale Asset Purchase programme (LSAP2). The portfolio rebalancing channel, however, is countervailed by the issuance of even more Treasury coupon securities, which may explain the temporary nature of the observed interest rate effects. In the extreme, Operation Twist 2 and LSAP2 can be viewed as just offsetting the adverse impact of the pronounced increase in outstanding government securities.Full publication: Threat of fiscal dominance?

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