Case Study On U.S. Operation Twist

In September 2008,along with the Lehman brothers declared bankruptcy and a number of well-known financial institutions were on the verge of bankruptcy ,subprime mortgage crisis turned into a global financial crisis formally.When the global economy was facing the worst situation in 70 years,The Fed continued lowering the federal funds rate that using the conventional monetary policy to tackle the financial crisis and recession.While the federal funds rate was under the zero lower bound (the core of the traditional monetary policy had lost its effectiveness).Accordingly,The Fed decided to apply unconventional monetary policy to deal with the financial crisis and the recession.In addition to continue to buy U.S. treasury bonds and agency debts to inject liquidity into the financial system which is called LSAPs .And there was another monetary loosening also became the center of attention—Operation Twist(OT).The OT involves buying longer-term bonds and simultaneously selling the shorter-dated issues it already held in order to lower long-term interest rates.The OT can extend the duration of bonds while not expand the size of the central bank balance sheet .The paper focuses on studying theoretical basis,basic framework and effectiveness of the OT.The paper takes the OT which was applied in 1961 and 2011 for example.In the case study part,we try to tease out the theoretical basis,basic framework and effectiveness of the OT used the charts and data showing the changes of macroscopic economic situation.The US's OT cases enriched the practice of the unconventional monetary policy and it's a beneficial reference to other central banks making monetary policy.In the paper,we found that the policy background operational approach and the practical impacts in this two OT cases had certain things in common,may the common factors be the signs to develop the OT Policy .The structural problem to the economic development China now faces and the press which the Central Bank faces have something in common with the US's economy dilemma before the OT started.The OTprovides illuminating which we solve the dilemma of the economic slowdown and capital outflows in China.Meanwhile,we combined with the economic circumstance in China,OT also opens up new opportunities for the development of bond markets of China and advance the interest rate marketability reform.