THE SLOPE, NOT THE LEVEL: INFLATIONARY EXTRACTION, PURCHASING POWER, AND THE SPEED OF ECONOMIC CONVERGENCE

This thesis develops a dynamic political-economy interpretation of inflation in which the central welfare loss is not necessarily a fall in the level of real income, but a reduction in the speed at which household purchasing power approaches its attainable frontier. A revenue-seeking government and a representative citizenry contest each period's growth increment. The government chooses an inflationary extraction intensity, while citizens undertake costly protest that protects part of the increment. The extraction technology is tied to classical monetary theory through Cagan money demand and the Bailey measure of the welfare cost of inflation: the Laffer peak limits feasible extraction and the local curvature of the deadweight loss disciplines its cost. The model produces three regimes—convergence, stagnation, and immiseration—and shows that, within the convergent regime, inflationary extraction can leave the long-run frontier unchanged while delaying its attainment. Hence, the government appropriates timing rather than the terminal level. With noisy best responses, behavioral mistakes raise the expected capture share and are observationally equivalent in first moments to more efficient extraction, making the mechanism difficult to identify from average paths alone. A first empirical assessment uses a panel of 38 OECD economies for 1995–2023 and an event-study design around central-bank-independence reforms. The evidence is consistent with a convergence-speed channel, although it does not yet establish the mechanism conclusively. The analysis implies that monetary institutions should be evaluated not only by their effect on inflation levels, but also by whether they protect the growth increments through which living standards converge.