Shall we twist?

In recent monetary history, central banks around the world have started to introduce unconventional monetary policy measures, such as extending or restructuring the asset side of their balance sheet. The origin of these monetary policy tools goes back to an intervention by the U.S. Federal Reserve System under the Kennedy administration in 1961 known as Operation Twist. Operation Twist serves as a perfect laboratory to study the effectiveness of such balance sheet policies, because interest rates neither were at their lower bound nor was the economy in a historical turmoil. We assess the actions of the FED and the Treasury under Operation Twist based on balance sheet data and evaluate their success using modern time series techniques. We find that, although being of rather moderate size, the joint policy actions were effective in compressing the long-short spreads of the Treasury bond rates.