Over recent years a consensus view has emerged in the macroeconomic literature on how governments may be able to overcome the deadlock of time-consistent inflation. The solution is handing the authority over monetary policy to an independent institution. In her chapter, Susanne Lohmann challenges this view. She even claims the conventional wisdom that institutions matter to be flawed.

In my comment, I will first provide a short overview of what we know about different institutional solutions to the time-consistency problem in monetary policy, next discuss why institutional solutions dominate reputational solutions, and, finally, take issue with a few related arguments.

Table 1.1 presents an overview of the different institutional approaches the government may choose for reducing the loss from time-consistent inflation. I believe it is useful to equate institutional solutions with precommitment rather than commitment. Commitment is just the promise of a specified policy path or conduct. Delivering on the promise yields credibility, the extent of which depends on how long good conduct is maintained. Thus, it takes time for the promise to be perceived as credible. Precommitment, in contrast, provides credibility on the spot, because it rests on legal constraints of government behavior.

Another point to note is that we need to spell out the nature of the constraints that make up an institutional solution. For example, delegating policy to a conservative central banker does not provide the lower expected or permanent rate of inflation computed by Rogoff (1985) if this banker can be dismissed at any time during his term.