BIS Review 96/2006  1  Understanding how prices and wages are set at the firm level is also a prerequisite for understanding the behaviour of the aggregate price and wage level over the business cycle and to see how they react to different types of shocks.
Nominal rigidities in price and wage setting also imply that monetary policy, and nominal demand fluctuations in general, have an impact on economic activity. Knowledge about price and wage setting is therefore fundamental to understand both the monetary policy transmission process and the potential trade-offs monetary policy may be faced with.