Macro: The Economic Models That Shape Our World

by Greg Kaplan

An inviting tour of modern macroeconomics―culminating in HANK, a modern framework that will transform the way we understand our economy and the policies that shape it.

Macroeconomics and macroeconomic policies shape our lives in profound ways, influencing everything from the price of groceries to the likelihood we’ll have a job next year. But much of what we hear about macroeconomics―from politicians, pundits, and even professors―bears little resemblance to how economists think about policy or to people’s actual experiences. Clearly, economists haven’t done a great job explaining their work to us―until now.

Macro is an inviting tour through the world of modern macroeconomics, taking readers to the research frontier―HANK, a framework that will change how we see inflation, debt, recessions, and more.?

In clear and engaging prose, Chicago economist Greg Kaplan demystifies how our everyday behavior connects to the biggest questions in fiscal and monetary policy. Tracing the evolution of economic thinking from Keynes to today, he guides readers through the models used to explain our economy, uncovers their flaws, and reveals what cutting-edge research tells us about managing the economy in good times and bad. These earlier models are valuable, Kaplan argues, but those that underlie much of conventional wisdom are fundamentally out of touch with the realities of how people spend and save, particularly the millions of Americans living paycheck to paycheck.

The journey culminates in the HANK (Heterogeneous Agent New Keynesian) model, the current state of the art that is more consistent with reality. HANK accounts for our diverse spending and saving habits and will transform the way we think about economic policy.

Written for anyone who wants to truly understand how our economy works, Macro is the long-overdue book that bridges the gap between pioneering research and real-world behavior.

Genres: Economics, Nonfiction

320 pages, Hardcover

Expected publication November 10, 2026

Reviews

[Demetri Papadimitropoulos · Rating 4.5 out of 5]

The Limits of a Better Model: Household Wealth, Economic Uncertainty, and the Boundaries of Monetary Power
On Greg Kaplan's “Macro,” the Evolution of Economic Explanation, the Rediscovery of Financial Difference, and the Unsettled Responsibilities of Central Banks
By Demetris Papadimitropoulos | October 20th, 2026

During the summer of 2007, the Federal Reserve Bank of New York had a problem it knew how to solve: the building was too cold. Greg Kaplan, then an intern, remembers researchers wearing embroidered sweaters supplied by the institution. Outside, New York sweltered; beyond it, the financial system was approaching a collapse that would expose serious weaknesses in economists’ understanding of the economy. Elsewhere, risks were accumulating through mortgages, debts, and institutions that prevailing models registered inadequately. “Macro: The Economic Models That Shape Our World” follows economists as they reconsider what their artificial economies leave out. The people missing from those models, and the authority claimed on their behalf, are harder to accommodate than a cold office.

Economists construct artificial worlds because the actual one refuses to hold still long enough for an experiment. A model removes complications, isolates relationships, and asks what follows when people behave according to specified rules. Kaplan traces macroeconomics from Keynesian accounts of consumption and aggregate demand through permanent income theory, representative-agent New Keynesian models, and eventually HANK, a framework allowing households to differ in income, assets, borrowing opportunities, and exposure to shocks. The movement is from one imaginary household standing in for everyone toward an economy populated by people whose differences change the predictions. An assumption about who inhabits the model becomes an assumption about how policy works.

Models Kaplan eventually finds inadequate are given a fair hearing first. Keynesian accounts of consumption explain how changes in spending can reinforce economic fluctuations. Representative-agent New Keynesian models connect household choices to inflation, employment, and monetary policy. Their simplifications were useful for some purposes, misleading for others; he does not demand that an earlier theory anticipate every later discovery. The chapters follow problems leading toward HANK, leaving competing routes through macroeconomics comparatively peripheral. It is less convincing when successive improvements make the destination appear preordained.

Early on, Kaplan invites readers into a multiplayer computer game. Restrict borrowing and some players can no longer spend as intended. Introduce uncertainty about jobs and they may save more. Their individual precautions reduce spending elsewhere, affecting people who did nothing to cause the disturbance. It also exposes the freedom economists possess when constructing an artificial economy: the designer decides how credit works, what participants know, and which choices exist. Trouble begins when rules chosen for convenience start looking like facts about households. Someone outside the game may have a mortgage, a pension, and thirty dollars available until payday.

The marginal propensity to consume keeps returning as Kaplan moves through this history. It describes how much of an additional dollar a household spends. Observed spending responses trouble models in which households can rearrange resources freely across time. The same concept reappears with a different explanatory burden: an earlier answer becomes inadequate once the reader knows to ask another question. Kaplan sometimes rehearses expectations, optimization, and consumption smoothing after their purpose is clear. The middle chapters can resemble a seminar whose instructor worries that someone near the back missed the previous equation. I occasionally wanted him to trust that the lesson had landed.

Robinson Crusoe offers a more personable entrance. Alone on his island, he can allocate work, consumption, and saving without the inconvenience of other people’s finances. He is an admirably cooperative citizen of economic theory. Kaplan uses this isolated economy to clarify decisions across time, then returns to the figure in a chapter titled “Three Hundred Million Robinson Crusoes.” The multiplication is funny because it exposes what solitude cannot explain. An economy of millions cannot be represented by one person’s preferences and financial circumstances repeated millions of times. Some people have cash but little property; others own valuable homes and possess almost no accessible savings. Crusoe has not been proved foolish or useless. He has acquired neighbors, and their differences alter the behavior of the entire economy.

In Kaplan’s account of permanent income, the older theory earns its place before its limitations appear. Spending depends partly on expectations about future resources, not simply the current paycheck. But someone expecting better earnings next year may be unable to borrow against them today. The problem is not that expectations cease to matter; it is that people cannot always move purchasing power between periods as freely as a model assumes. Knowing that tomorrow may be better does not guarantee that a lender will help pay for dinner tonight.

Perhaps no phrase in “Macro” does more work than “wealthy hand-to-mouth.” Its halves seem to cancel each other. Wealthy suggests reserves, security, accumulated means to absorb misfortune. Hand-to-mouth suggests income arriving just in time to be spent. A family may own a home and hold substantial retirement assets while keeping little cash in accounts from which ordinary bills can be paid. Give that family a temporary payment and its spending may rise sharply, despite a net worth that would lead a simpler model to predict restraint. Kaplan’s work with Giovanni Violante and collaborators arose from observed consumption responses that conventional models handled poorly. A household can possess substantial resources and still be constrained in its immediate choices.

A comparison of total wealth and liquid wealth makes the problem difficult to dismiss. Housing equity and retirement savings may accumulate even when readily accessible balances remain modest. The people being counted have not changed. The same population can look prosperous under one definition and constrained under another, without a single household gaining or losing a dollar. Kaplan first establishes the familiar life-cycle picture of wealth accumulation, then alters it by distinguishing liquidity, then asks what the distinction predicts about spending. A dollar of housing equity is not, for immediate consumption, a dollar in a checking account. Only one can buy dinner without another transaction intervening.

Picture a household with substantial equity in its home needing a small amount of cash. If all assets are freely accessible, the solution looks simple: sell the house, release the equity, and spend what is required. Then reality begins submitting invoices. There are fees and taxes, another home to find, possessions to pack, arrangements to make, hours and energy to surrender. A house is not an oversized wallet, and a retirement account is not a checking account with more impressive stationery. Selling a home to finance a modest purchase is possible in the abstract, but possibility is not the same as an economically sensible choice. By the time one imagines carrying the furniture downstairs, the difference between owning wealth and being able to spend it has acquired physical weight.

A wealthy hand-to-mouth household, however, is not simply a poor household with better furniture. In “The Wealthy Hand-to-Mouth,” published in “Brookings Papers on Economic Activity” in 2014, Greg Kaplan, Giovanni Violante, and Justin Weidner distinguish households with substantial illiquid assets from those with little wealth of any kind. Both may respond strongly to modest changes in available income, but their capacity to survive a sufficiently large shock can differ. Someone without comparable assets has no such reserve. If “wealthy hand-to-mouth” became a catchall description of vulnerability, it would reproduce the error the research corrects: grouping people with different resources together because one measure makes them look alike.

During the technical chapters, Kaplan’s sentences follow a recognizable path. He moves between mortgages, paychecks, savings accounts, and unemployment on one side and marginal propensities to consume, intertemporal decisions, and equilibrium models on the other. The everyday language does not replace the economics. He can be reluctant to leave a concept after explaining it well, and a second explanation occasionally follows a perfectly adequate first one. The book is more patient than graceful in places. Kaplan wants the reader to notice the mechanism, not applaud the guide for making it sound easy.

It is the organization, more than individual sentences, that makes this patience conspicuous. A model is introduced, its usefulness demonstrated, an anomaly identified, and a modification developed. Repeat often enough and the next chapter’s shape becomes predictable. Earlier frameworks are frequently encountered through deficiencies HANK will eventually address, while rival explanations of instability stay comparatively peripheral. Yet a history arranged as increasingly capable answers can make research look tidier than it was. The reader receives an intimate account of how one influential set of problems evolved, not a complete map of the discipline.

More interesting than HANK’s arrival is the uncertainty Kaplan discovers inside its additional detail. Introduce differences in debt, savings, employment, and access to credit, and the channels multiply. A rate change may alter one person’s mortgage payments, another’s interest income, and a third person’s wages through its effect on business activity. Monetary policy begins to resemble consequences traveling through a crowded building whose occupants have different obligations and resources. Greater detail does not guarantee more precise control. Precision about mechanisms and certainty about outcomes are not the same achievement. The household differences that make the model more credible also make any single policy forecast less reassuring.

Individual losses during recessions make the stakes of these differences harder to overlook. A modest decline in aggregate output may coexist with devastating unemployment and income losses concentrated among particular households. Kaplan distinguishes the welfare costs of individual shocks from fluctuations in an economy-wide average. Preventing a small movement in total consumption may matter less than protecting families from losses they cannot insure against privately. Reliable unemployment protection and other social insurance therefore occupy an important place in his policy argument. But the size of a contraction cannot tell us, by itself, how much suffering it caused or who endured it.

The pandemic tests this reasoning under conditions in which the usual vocabulary of stimulus becomes insufficient. Illness, restrictions on activity, interrupted production, and uncertainty changed what people could safely do and what businesses could supply. A transfer to someone who lost earnings might prevent hardship without producing much immediate spending. Kaplan separates support for households from attempts to increase aggregate demand, a distinction easily lost when both involve government expenditure. A payment that keeps rent current or groceries affordable need not justify itself through a large multiplier. Kaplan refuses to let one instrument impersonate an answer to every economic problem.

Rather unexpectedly, Chapter 19 turns the same skepticism on the newer models. Kaplan acknowledges that some earlier exercises concern shocks households do not anticipate. Yet someone surprised by a particular recession is not equivalent to someone who has spent years knowing recessions can happen. For a household anticipating recessions, the possibility of trouble has already shaped saving, borrowing, and risk-taking. An insurance system may change behavior long before anyone claims its benefits. He identifies an assumption, shows how it narrows the question, and indicates what remains outside the analysis. His willingness to subject HANK to the examination that exposed weaknesses in its predecessors earns trust even when his policy conclusions invite disagreement.

One of the epilogue’s central images is familiar enough to pass unnoticed: the economic pie and the distribution of its slices. Increasing the pie’s size does not tell us who receives the additional portion. An interest-rate change may help borrowers while reducing income for some savers; employment and asset-price changes may benefit households unevenly. A reader need not master equations to recognize that a larger pie and a fairer division are different questions, or that the method used to enlarge it may alter the division. By now monetary policy no longer resembles an adjustment to an economy populated by interchangeable people. The slices are visible. Their unequal distribution persists even when the aggregate result looks desirable.

Plumbing and electricity supply another domestic image, with a different political effect. Kaplan compares a central bank’s proper responsibilities to maintaining essential infrastructure. Their stewards, however, need not direct everything that happens in the building. This supports his preference for a relatively narrow central-bank mandate centered on price stability, financial stability, and emergency liquidity. The earlier image exposes the distributional effects of economic management; the later one makes a division of authority seem almost natural. Someone must keep the water running. Yet interest-rate decisions affect debtors, savers, workers, and public borrowing costs differently. Kaplan’s analogy argues persuasively for institutional modesty, but the boundary between technical maintenance and politically consequential intervention is harder to draw than the image suggests.

Only by overlooking Kaplan’s argument could one mistake his caution for indifference. Central-bank independence raises legitimate questions when unelected officials make choices with substantial consequences for different groups. Kaplan also recognizes that central banks must provide liquidity and contain financial crises decisively. He is not asking institutions to watch a recession unfold with their hands politely folded. I find the case for restraint serious, particularly when policymakers promise exact results from uncertain mechanisms. Still, uncertainty does not settle the question of intervention. It can justify restraint, but it can also make the consequences of inaction more difficult to tolerate. A model cannot decide which danger a society should accept.

Under the account of monetary transmission lies a distinction between how strongly a policy works and how it works at all. In “Fiscal and Monetary Policy with Heterogeneous Agents,” published in the “Annual Review of Economics” in 2025, Adrien Auclert, Matthew Rognlie, and Ludwig Straub discuss research showing that heterogeneous-agent models can generate aggregate monetary-policy effects comparable to standard New Keynesian models even when their channels differ. It complicates the inference that indirectness necessarily means weakness. Interest-rate changes need not operate chiefly through a representative consumer rearranging purchases between today and tomorrow to influence the economy substantially. Kaplan’s case for cautious demand management nevertheless requires judgments about predictability, distribution, institutional authority, and the risks of acting or failing to act. Mechanisms do not supply an automatic verdict, and citing their complexity cannot relieve policymakers of responsibility for choosing.

Legitimacy remains the difficulty after the equations have been worked through. Who should weigh the gains of borrowers against losses to savers, or additional employment against inflation risk? When can such decisions be delegated to independent specialists, and when should elected officials answer for them? The institutions have distinct legal responsibilities, but the economy does not respect their organizational chart. A narrower central-bank mandate may be wise; it cannot eliminate distributional consequences within that mandate. Kaplan is more conclusive about these entanglements than about where authority should stop. His explanations give readers reasons to examine his institutional preferences, not an obligation to accept them. The book becomes more interesting where its evidence stops short of settling its politics.

Over the course of “Macro,” Kaplan makes demanding research accessible without pretending its hard parts are decorative. He treats earlier theories fairly, lets empirical discrepancies change the story, and explains why a household’s immediate access to money may matter more for spending than the total value of its possessions. The prose is lucid rather than dazzling; the historical sequence occasionally too orderly; the explanatory patience sometimes excessive. His policy preferences do not always follow as tightly from the models as the surrounding exposition might suggest. A balance sheet looks different after the discussion of liquidity. A recession statistic looks less complete after the account of unequal losses. A central-bank decision becomes harder to describe as merely technical. My rating is 85/100, equivalent to 4.50/5 Goodreads-compatible stars.

Some theoretical preparation will test readers seeking immediate answers about interest rates, inflation, or government spending. The book also leaves room for a broader account of competing macroeconomic traditions and a more searching defense of its preferred institutional boundaries. His strongest chapters make a small assumption increasingly uncomfortable until a new model becomes necessary. His best moments of self-criticism apply that discipline to HANK itself. A model may answer its chosen question beautifully and still be unsuitable for another. Readers who have followed these successive revisions can apply the lesson to Kaplan’s conclusions. I suspect he would welcome the argument, though the answer would probably require another chapter.

Down the corridor of those refrigerated Federal Reserve offices in 2007, the sweaters now seem less like evidence of professional blindness than a reminder of the distance between correcting a known inconvenience and recognizing an unfamiliar danger. Inside, a cold room could be made tolerable. Outside, risks accumulated through mortgages, debts, employment prospects, and household decisions that no single representative person could embody. Somewhere beyond its equations, a family owns a house it cannot readily turn into groceries; a worker saves against a recession that has not yet arrived; an institution adjusts an interest rate whose consequences travel through lives it cannot completely see. The instruments are running. The windows still matter.