DefinePK

Abstract

The last 10 to 20 years have seen a rapid rise of a new school in Macroeconomics. One of the most interesting characteristics of this school is its use of non-econometric methods for predicting and calculating various variables of the economy. If traditional econometrics has lost some of the force it has had for decades, it is of interest to analyse the merits of the new system replacing it. Most importantly, it is of interest to study the methodological justification of this new system and the paradigm it rests on. The latter is the main purpose of this paper. Today, the world of macroeconomics is characterised by two schools of thought, namely the Fresh Water Schools and the Salt Water Schools. The FW schools are those that follow Lucas-style neoclassical growth theory, downplay the use of econometrics in favour of what is known as calibration and numerical methods, and are proponents of the ideas of frictionless markets and rational expectations. These include schools like the University of Chicago, Minnesota, Pennsylvania and Rochester. The SW schools are relatively Keynesian in their approach towards the market and depend heavily on econometrics. Such schools include Harvard, MIT, UCLA, Princeton, etc. The purpose of this essay is to introduce to the reader the idea of calibration used by the FW schools, and to analyse its methodology.