How do Households Cope during Aggregate Shocks? Evidence from the 2009-2015 Oil Crisis in Nigeria

The effect of global oil price fluctuations on households' costs of living in Nigeria is examined. We extend the Aggregate Demand/Supply (AD/AS) model by incorporating aggregate shock and idiosyncratic risk with cross-sectional heterogeneity in households' distributions and consumption substitution dynamics. Results from our model show that while positive oil prices reflect higher output, whether growth results from inflation or income-level growth remains unclear ―demand-side inflation will raise price levels, amplify budget constraints and ultimately lower welfare. For the empirical analysis, we use oil prices between 2009 and 2015 and micro-level data from the Nigerian General Household Survey (GHS) collected between 2010 and 2016 in Nigeria. In support, we show that increasing oil prices leads to greater consumption. However, the effect varies heterogeneously ―reflecting households' location and consumption substitution dynamics, adjustments in household size, and labor supply are some coping responses to oil price changes.