Goldilocks Economy

Updated on April 3, 2024
Article byJyotsna Suthar
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Goldilocks Economy?

Goldilocks Economy is an economic system that has neither too much inflation nor recession within the nation. The prime feature of this economy is that it has a perfect balance of economic levels. In short, the economy is not too hot or too cold.

Goldilocks Economy

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The concept originated from the famous children’s book Goldilocks and Three Bears. It describes a state that fits perfectly into the economy. In other words, there is no expansion or contraction at the economic level. It is followed by steady growth with the right amount of inflation and recession.

Key Takeaways

  • Goldilocks’s economy is in the economic phase with a perfect balance of inflation and recession. In short, the system is neither too hot nor too cold.
  • On the contrary, there’s the term anti-goldilocks economy, which refers to an extreme condition of inflation or recession.
  • The features of this economy include low inflation, high asset prices, low unemployment and interest rates, and steady growth rates.
  • The government can focus on empowering economic growth and monetary and fiscal policies to maintain this economy.

Goldilocks Economy Explained

A Goldilocks economy scenario is an economic phase governed by the balance of employment, growth, and market forces. It is an economy that is as perfect as economists want it to be. In this stage, the macroeconomic indicators are at the right pace for growth. Examples of this economy include the Korean War between 1956 and 1957. A stable economy was created during this time, especially at the end.

In a Goldilocks economy, the condition is relatively stable compared to other phases. There are few fluctuations experienced within the economy. As a result, the central banks may refrain from revising or hiking interest rates. Thus, it creates favorable circumstances suitable for a perfect economy. However, at a certain point, it will lead to the end of the Goldilocks economy.

The concept of Goldilocks economy was introduced in the storybook during the mid-19th century. According to the story, the young girl tastes three porridges at different temperatures. Ultimately, she agrees to the third bowl, which is neither too hot nor too cold. A similar reference to this definition was seen in the Wall Street Journal article Return of the Saver on December 20, 1966. In this journal, an anonymous Johnson administration official stated that the United States was approaching this economy. Later, by the end of the 20th century, there were other notable mentions. However, the Goldilocks economy scenario became popular through the report The Goldilocks Economy: Keeping the Bears at Bay published in 1992.

Another similar term anti-goldilocks economy, on the other hand, refers to an economy that is too hot for inflation and too cold for growth. It means that the nation has extreme inflation that prevents any growth. Furthermore, it leads to a negative economic state. Therefore, an anti-goldilocks economy is usually not wished for by any country.

Features

With the popularity of this economy, it has specific characteristics that make it easily recognizable. Let us look at its features:

1. Low Inflation

One of the significant features is the inflation rate. At this moment, the pace of inflation is moderate compared to the hyperinflation phase. It is usually measured in the consumer price index (CPI) or the producer price index (PPI).

2. Low Unemployment

Although total employment is nearly impossible, a substantial amount of employment can be achieved. It means that a tiny percentage of people are left with no work or job. However, the rest of the population earns daily, weekly, or monthly.

3. Low-Interest Rates

Here, the interest rates are low, which allows the lenders to charge less to the borrowers. The households’ borrowing capacity has increased, indicating a recessionary phase.

4. Steady Economic Growth

The central banks do not try to hike or revise the interest rates here. In short, they make no attempts to adjust the rates per the situation. Since the economy is in a stable condition, there is no requirement for a revised monetary policy. For example, the federal government may keep the Fed rates the same.  

5. Visible Inflation In Asset Prices

In this phase, the prices of stocks, bonds, and other assets are at their highest potential. However, to determine the real-time growth rate, it might take time to ascertain this inflationary rise in asset prices.

Examples

Let us look at the following examples to understand the Goldilocks economy meaning and comprehend the concept better:

Example #1

Suppose Orange is an imaginary nation that faced quite a lot of destruction after the war and pandemic. As a result, economic levels dropped by a considerable percentage. In mid-year, the growth rates were different compared to the post-war period. Following are the growth rates before and after the war crisis:

Inflation rate

  • 4.5% (Jan-June)
  • 3% (Post-war period)

Unemployment rate:

  • 4% (January-June)
  • 2.5% (Post-war period)

Gross Domestic Product (GDP)

  • 5.9% (January-June)
  • 6.3% (Post-war period)

In this schedule, the inflation and unemployment rates are low. However, the GDP rate has remained steady before and after the war. This balance between the inflation rate, unemployment rate, and GDP takes Orange close to achieving this economy.

Example #2

According to a recent CNBC news article from June 2023, American reporter Ron Insana seemed predicting the emergence of Goldilocks economy in the US. Given the frequent hike in the interest rates from the Federal Reserve or Fed, as it is commonly called, the economy has always signaled towards slipping into recession, the ace confirmed, but at the same time, he stated how the economy is getting stronger rather than weaker in the midst of all economists and market experts predicting recessions.

The Fed, on the other hand, seems to find it difficult to cope with the predicted Goldilock economic situation expected to emerge. This is because of the consistency in the labor demand and the surging wages, which in no manner signify recession or inflation, entirely. With low unemployment and secured jobs in addition to the rising interest rates of the Fed – both imply that the nation is neither witnessing inflation, nor recession, and has a balanced economy, signifying the emergence of Goldilocks economy.

How To Maintain?

Following are the steps on how to maintain this type of economy in a nation:

  1. The government should focus on boosting the civic amenities within the economy. For example, improvement of the roads, buildings, hospitals, and similar things.
  2. Another possible way is to implement a taxation and lower interest rate policy. It will encourage consumer spending within the household groups.
  3. With new monetary and fiscal policies, the country can achieve higher but steady growth every year. It will help in maintaining economic stability in the nation.

Frequently Asked Questions (FAQs)

1. What are the three situations for the Goldilocks economy?

According to the story, the three primary Goldilocks conditions include hyperinflation, recession, and a mixture of both. While the former has too much inflation (or is too hot), the second phase has a downfall (too cold). However, the third condition is equally balanced between the two. 

2. What are the limitations of the Goldilocks economy?

The Goldilocks economy carries a severe risk of complacency. If business people and decision-makers grow familiar with the current situation, they might need to consider potential future obstacles or underlying structural problems. Natural disasters and a range of geopolitical events can also upset the equilibrium of the economy.

3. Can Goldilocks economy last indefinitely?

An economy can go through protracted periods of moderate growth and stability; however, given the cyclical nature of economics and the possibility of outside shocks or disruptions, it is unlikely that a Goldilocks economy can endure forever.

This has been a guide to what is Goldilocks Economy. Here, we explain the concept along with its examples, features, and how to maintain it. You can learn more about financing from the following articles –

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