Empirical verification of short-run aggregate supply based on Lucas model and new Keynesian theory

The aim of the master thesis is to empirically analyze if there is a support for new classics or new Keynesians as a dominant theory of short-run aggregate supply curve. The analysis is based on dynamic panel data model for 38 countries and period between 1970 and 2014. Because the results show some evidence on negative significance of level of inflation in contrast with its variability, I conclude that there is support for the new Keynesian theory. I focus on examination of the panel data assumptions such as the stationarity of explanatory variables, existence of the individual or random effects, validity of homogeneity of slope coefficients and mainly the cross-sectional dependence of error terms. After testing for these assumptions, I choose the most suitable method of estimation for dynamic panel data models. I use these methods for analyzing both linear and non-linear specification of the given model. As a result, we can see that the selection of right estimation method plays a great role in final outcomes. I also check model robustness by including changes of real oil price as a proxy variable for the supply shock in the economy