The Dynamics Of Exchange Rate Expectations Formation: The Nigerian Perspective

This paper examines the nature of exchange rate expectations formation (whether it is static, forward or backward looking) and the major macroeconomic determinants of exchange rate expectations formation process in Nigeria. Based on a robust review of both empirical and theoretical evidences, the paper applied unit root test, the Johansen cointegration and Error Correction Mechanism (ECM) in the validation of the nature of exchange rate expectations formation in Nigeria. The paper found that in the context of inflationary expectations, exchange rate expectations formation follows the structuralists’ inflationary expectations. The paper also found that depending on the definition of exchange rate adopted, real income is significant in expectations formation and expectations formation does not follow the portfolio and chartists approaches. Previous changes in exchange rate were found to be significant in expectations formation depending on the definition of exchange adopted. The paper recommends that inflationary expectations should be incorporated into the policies of exchange rate expectations formation surveillance.