Reviewed by Aug 27, 2020| Updated on
Goldilocks economy refers to the perfect or the ideal state of an economy. The economy will reflect the stability of growth, complete employment, and so on. There is neither a high growth nor a slowdown. The economy follows a steady growth to avoid any ups and downs. It neither has inflation combined with high growth nor a recession.
Understanding Goldilocks Economy
The name Goldilocks economy is borrowed by the famous children’s story, Goldilocks and the Three Bears. The economy is said to resemble the perfect state of happiness for all.
The goldilocks economy is characterised by the following features:
The rate of unemployment is low. The rate is measured by taking into account the count of people who are ready to work, able to work, and those who have asked or searched for work in the last four weeks.
The prices of assets, such as real estate, bonds, stocks and other assets increase.
The interest rates are low. The market rate of interest or the benchmark rate is low.
Inflation is low. The measure of inflation based on the Consumer Price Index (CPI) and the Producer Price Index (PPI) is low.
The GDP numbers grow steadily. GDP is a macroeconomic measure of the growth of the country. It takes into account all the segments of the economy related to goods or services. In economic terms, if there are two consecutive quarters of negative GDP growth, the economy is in recession.
A Goldilocks economy generally requires the government to incrementally spend on infrastructure, roadways, and railways, and encourage public-private participation in the growth of various industries. The government should also have a favourable tax policy to support business investments and boost consumer spending through tax cuts.
The low-interest rates, tax cuts, low inflation may falter practically in supporting steady long-term economic growth. The economy may grow steadily for a few years before changing the pace of growth. Also, inflation is likely to be checked by the monetary policy of the central bank.
Hence, the central bank’s policy of cutting or hiking benchmark rate also has an impact on economic growth. Lastly, economic growth can also be influenced by external factors, such as global factors.