How Do Global Shocks Affect Australia?

Foreign or global economic and financial shocks can be significant drivers of economic outcomes in small open economies such as Australia, and are therefore a considerable source of uncertainty to the Australian economic outlook. Examining the extent to which global shocks affect the Australian financial system and economy and the channels through which these shocks operated over the 1990–2019 period, we find that global shocks drive considerable variation in the exchange rate and the cash rate, but a smaller proportion of variation in economic variables like real GDP. This suggests that, over our sample, the exchange rate and domestic monetary policy have effectively buffered the Australian economy from global shocks. Unlike some other recent literature on global spillovers, we do not find the Australian banking system to be a substantial channel of financial and economic spillovers to Australia.