The aim of this thesis is to shed some new theoretical and empirical light on the issues of financial fragility and instability of the macroeconomic systems. The thesis consists of four independent essays. The first essay develops a macrodynamic model in which firms’ and banks’ desired margins of safety play a central role in macroeconomic performance. Mathematical analysis and numerical simulations illustrate that the endogeneity of the desired margins of safety during the investment cycles is conducive to instability. Moreover, it is indicated that fiscal policy can reduce the destabilising forces in the macroeconomic system. The second essay explores, via a stock-flow consistent model, the macroeconomic channels through which securitisation and wage stagnation can jointly affect financial fragility. The results from simulation experiments provide support to the view that the combination of risky financial practices and higher inequality can substantially increase the likelihood of financial instability in the macro system. The third essay proposes a new bank liquidity ratio that explicitly considers the time-varying nature of liquidity by assigning weights on banks’ balance sheet items that depend on financial risks and perceptions. This ratio is estimated and assessed for the EMU-12 countries. Furthermore, the essay investigates the link between macroeconomic fragility and bank liquidity for the EMU. The empirical results suggest that banks in the EMU do not self-impose higher liquidity requirements when macroeconomic fragility increases. The fourth essay puts forward a liquidity index that extends Minsky’s well-known financial taxonomy of economic units to the government sector. The index is estimated for Greece over the period 2001-2009. The data analysis supports the view that the financial fragility of the Greek government sector increased significantly before the sovereign debt crisis.
