Asymmetric adjustment of the equilibrium relationship between the nominal interest rate and inflation rate

This paper investigates the equilibrium relationship between the nominal interest rate and inflation rate in Japan using a threshold cointegration test, which allows for asymmetric adjustment. While the Engle−Granger method assuming symmetric adjustment cannot obtain the result of cointegration, a threshold cointegration approach provides clear evidence of the cointegration relationship characterized by asymmetric adjustment toward equilibrium. This shows that the long−run equilibrium relationship between the nominal interest rate and inflation rate is stable with asymmetric adjustment. The author would like to thank Shigenori Shiratuka, Shin−ichi Kitasaka, and Yoshitomo Kiyokawa for helpful comments and discussions