This is a good discussion of the moral imagination. It addresses specifically how necessary good children’s stories are in forming the moral imagination, but it also gives a very good definition as well:
The moral imagination is not a thing, not so much a faculty even, as the very process by which the self makes metaphors out of images given by experience and then employs these metaphors to find and suppose moral correspondences in experience. The moral imagination is active, for well or ill, strongly or weakly, every moment of our lives, in our sleep as well as when we are awake. But it needs nurture and proper exercise. Otherwise, it will atrophy like a muscle that is not used. The richness or the poverty of the moral imagination depends upon the richness or the poverty of experience. When human beings are young and dependent upon parents and others who assume custodial care for them, they are especially open to formation through experiences provided by these persons. When we argue or discuss what kind of education or recreation our children should have we are acknowledging these realities.
Without the moral imagination, by the way, we would have no way of truly knowing God who is spirit.