Interview Knowledge

Preparing for a job interview is no easy task. There are many different types of questions to practice – behavioral, technical, situational, etc.; however, there is a plethora of information on the internet about interview questions. I have also written about questions that I believe are important for veterans to be able to answer. There is no excuse for not being prepared. Since interview preparation is a time-consuming process, do not wait to begin. It is a good idea to always be ready for an interview.

Impromptu interviews can happen at any time (ever heard of the elevator pitch). These “mini” interviews are opportunities to sell yourself. The topics of conversation are different from traditional interviews. Questions similar to “what did you do the last time you had job priorities that pulled you in different directions” is most likely not a topic. General knowledge, however, is.

To help in these situations, I recommend having an understanding of economics. In full disclosure, this is a biased opinion, as I enjoy economics. Economics does, however, play a role in many fields. I have written about economics before and will again now. This post is about a Chicago Fed Letter titled “The Interplay Between Financial Conditions and Monetary Policy Shocks.” Do not be scared when you download the paper. The PDF is 51 pages, but the actual paper is only 15. If you are not familiar with some of the concepts that are discussed, treat this as an opportunity to learn.

The paper covers three main topics:

  1. Comparing monetary shocks versus financial shocks.
  2. How successful is monetary policy?
  3. What happens when there is no monetary policy response to financial shocks?

In theory and practice the monetary policy conducted by the Federal Reserve (Fed) works to counter the effects of financial conditions. When financial conditions are easy, the Fed tightens monetary conditions and visa-versa. (Tightening monetary conditions means raising the fed funds rate.) The authors determine financial conditions by using a few different measures. The main measure, the excess bond premium, was described in a different paper. I am not familiar with this measure; I will have to read the other paper and do some learning of my own. For monetary policy, they use the fed funds rate – the main policy tool for the Fed.

The findings for the first topic are already taught in economics 101 – the effects from monetary policy work through the economy slowly and are variable; the effects from financial shocks peak quickly and die out faster than monetary policy. To reach this conclusion the authors measured effects on gross domestic product (GDP) and business fixed investment (BFI). They find that easy financial conditions have a larger effect on BFI than easy monetary conditions, with easy monetary conditions having a larger effect on GDP. Both easy financial and monetary conditions have positive effects on GDP and BFI, with monetary policy effects lasting longer. They determine the length of the effect by measuring how long the measure is above trend.

Concerning the second topic, the authors find that the effects from financial shocks are 50% larger and last 2 years longer with no monetary policy. In other words, monetary policy dampens the effects of a financial shock. Of course, some people may be skeptical about this finding, as the authors have a vested interest in people believing that monetary policy is necessary; however, most economists believe that the authors’ findings are true. The main debate is usually about how much the Fed should do to counter financial shocks.

The third topic of the paper is looking at current monetary conditions. The Fed’s current target for the fed funds rate is 0.25-0.5%, with the recent effective fed funds rate being 0.41%. At this level, known as the zero-lower bound (ZLB), the Fed will have little room to counter the effects of a financial shock that tightens financial conditions. (In this situation the Fed would want to lower the fed funds rate.) The third topic explored how the model reacts to the ZLB. The effect was measured retroactively. They used historical data and when monetary policy reacted to a financial shock, the authors inserted into the model a counter monetary policy, negating any effect from monetary policy. Using the different measures of financial conditions, they found that “in all but one of these cases, we find that the ZLB contributes to generate instability in the response to the financial shocks.”

What is the main takeaway from this paper? Or more importantly, what nugget of information can you remember that may help in a formal or informal job interview? I recommend remembering the third topic of the paper. The current fed funds rate is low, near the zero-lower bound. If there is a tightening financial shock in the economy, the Fed will not be able to use the fed funds rate to counter it. That is simple enough. Obviously, if you are attempting to find a job that is finance related, you will need to have a better understanding. For most other fields, that basic takeaway should be good enough to impress a recruiter or interviewer.

If economics is not your thing or not important for your career field, I am sure there is other knowledge that is pertinent to your field. I am also sure that this information does not include who won the football game last weekend or just got kicked off a trendy reality TV show. To impress an interviewer, it is important you know more than the latest Hollywood gossip.

Go read something useful and impress your next interviewer.