What is a
Goldilocks scenario for an economy?
Goldilocks
is a state of economy, where there is not too high growth which may lead to
inflation and at the same there is not too low growth which may lead to slow
down and further recession.
In other
words, the Goldilocks scenario refers to an ideal state of economy where there
is steady growth, low unemployment rate, low inflation as well as low interest
rates.
But why is
it termed as Goldilocks?
Ø It is a reference taken from the
19th Century English fairy tale "Goldilocks and the Three Bears".
Ø In this fairy tale, there is a
family of three bears including Father Bear, Mother Bear and a Baby Bear.
Ø So as they are a family of three,
they have three chairs in their house, three beds, and everything in counts of
three.
Ø One day, Mother Bear makes three
dishes of porridge for breakfast but as it was too warm to eat, they decide to
go for a walk in the forest.
Ø While the Bear family of three were
away, a woman named Goldilocks arrived at their home.
Ø She found porridge on the table and
decided to eat, but found Father Bear's too warm, Mother Bear's too cold but
Baby Bear's perfect to eat. So she eats all of Baby Bear's porridge.
Ø Similarly, there were three chairs
and she decided to sit, but found Father Bear's chair too hard to sit, Mother
Bear's chair too soft, but Baby Bear's perfect to sit. So she sits on the Baby
Bear's chair but breaks the chair as she sits on it.
Ø And as the Bear family arrives from
the forest, Goldilocks runs away.
The Essence of Goldilocks
·
The
Bear family found that everything belonging to Baby Bear was used by Goldilocks, as it
was ideal and not on any extremes.
·
So
this is how the term Goldilocks was coined for an economy, a state in which the
economy finds every parameter to be ideal, be it Growth, Inflation, Employment
or Interest rates.
·
Low
unemployment takes care of the demand side in the economy and low interest
rates facilitates capital expenditure thus taking care of the supply side in
the economy.
·
The
ideal situations in a Goldilocks state of economy, encourage the businesses to
go for expansion, leading to top line and bottom line increase which in turn
increases shareholders wealth.
·
But
in reality Goldilocks scenario in any economy is transitory in nature and is
not sustainable as the acting economic agents take the economy on either
extremes - Inflation or slowdown.
· And that's where the central banks come into picture with their monetary policy tools to redirect the economy towards the Goldilocks phase, although again transitory.
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