Non-linear adjustment in the term structure of interest rates: a cointegration analysis in the non-linear STAR framework

Abstract

The term structure of interest rates in Japan is analysed by means of a cointegration test in a non-linear smooth transition autoregression (STAR) framework. The STAR approach tests for the null hypothesis with no cointegration against cointegration including a globally stationary process. The results of the STAR cointegration test, differing from the results of cointegration tests assuming linear adjustment, show that the long-run equilibrium relationship between long-term and short-term interest rates is stable with non-linear adjustment. The results indicate non-linear adjustment in the term structure of Japanese interest rates.