DEFINITION of 'Goldilocks Economy'

An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. There are no exact markers of a Goldilocks economy, but it is characterized by a low unemployment rate, increasing asset prices (stocks, real estate, etc.), low interest rates, brisk but steady GDP growth and low inflation.

BREAKING DOWN 'Goldilocks Economy'

Regulators use fiscal and monetary policy tools to try to create an economy with these conditions. Economic conditions abroad, and regulators’ reactions to them, also influence whether an economy can achieve a Goldilocks state. This state is ideal for investing, because as companies grow, stocks perform well, and in the absence of inflation, bonds will hold their value. If GDP grows too quickly and inflation creeps up too quickly, however, the economy can overheat and a bust can result.

While business cycles vary in intensity and duration, the U.S. economy typically goes through five phases as part of the business cycle: growth/expansion, peak, recession/contraction, trough and recovery. A Goldilocks economy may occur during the recovery and/or growth phases. The U.S. economy of the mid- to late-1990s was considered a Goldilocks economy because it was "not too hot, not too cold, but just right." This term has also been used to describe the economy as it recovered from the tech bubble burst in 2003–2004 and as it expanded in 2013 after the housing bubble burst in 2008. Because we have business cycles, a Goldilocks economy should be considered a temporary state.

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