Thursday, September 17, 2015

What is a Goldilocks Economy ?

  • A Goldilocks economy is when growth isn't too hot, causing inflation, nor too cold, creating a recession
  • It has an ideal growth rate of between 2-3%, as measured by GDP growth
  • It also has moderately rising prices, as measured by the core inflation rate

A hot economy shows symptoms like high inflation, high inflation leading to very high Nominal GDP which sometimes projects stagnant economy as growing fast. Such unhealthy symptoms doesn’t attract FDI and Qualified Foreign Investors for FII.
A cold economy has symptoms like high unemployment, stagnant or receding economy, high unemployment leads to high inflation for limited products but unlimited demands leading to Phillip curve scenerio. This situation also shows fragile situation of nation’s economy.

A Goldilocks economy is one that is neither too aggressive nor too defensive. It stays within stipulated limits of inflation and is conducive to moderate growth. The monetary policy in such economy tends to be a balanced one, i.e. neither too high interest rates that they deter industrial expansion, nor ultra low so as to boost up inflation. The phrase has been derived from a children’s story (Goldilocks and Three Children) and was first used in economics in 1992.

Recently (June 2015), the RBI has termed the scenario in India as one resembling the features of a Goldilocks Economy. Following are the reasons why it can be so termed:
a) The inflation rate – both wholesale and retail – continue to be under control at least for 2 quarters. After the RBI set for itself “inflation targeting” as suggested by Urijt Patel committee, the CPI inflation seems to be hovering around~ 5%, well within the 6% range.
b) However, there is no scope for complacency as prospects of a weak monsoon.
c) Rural wage growth continues low, resulting in subdued aggregate demand. Core industries growth is contracting, and capacity utilization for the industry @ 70% is far from optimum, thus negating any meaningful employment expansion.
d) The government’s fiscal consolidation efforts seem to be impressive as they have confined the Current Account Deficit below the target of 4.1%. However, it is also hindering public investment at a time when the private sector is looking to the government to spend and boost demand.

The Indian economy is currently loaded with challenges from both sides – fiscal consolidation as well as public investment expansion. The easing of inflation does provide scope for a moderate economic growth over the medium to long term, and it is definitely apt to term Indian econmy as “goldilocks economy.”

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