RDP 2024-10: How Do Global Shocks Affect Australia? 7. Conclusion

We examine the extent to which global shocks affect the Australian financial and economic variables using a FAVAR model. We find that global shocks explain substantial variation in variables that are thought to buffer the economy from global shocks (the exchange rate and the cash rate), but less variation in other economic variables (especially real GDP). Recent literature on global spillovers has particularly focused on the international banking channel as a carrier of global shocks. However, we find that the response of Australian banking sector variables to global shocks are inconsistent with this channel being the primary driver of spillovers to Australia. We suggest several features of the Australian banking sector that may drive this result, particularly around funding and lending behaviour, and bank risk management.

Future research could also more closely examine how the characteristics of countries' banking systems affect estimates of the importance of the international banking channel as a carrier of global shocks. Another avenue for further research could be to examine the extent to which the cash rate acts as a buffer against global shocks directly (i.e. directly viewing and responding to global variables) or indirectly (in response to domestic economic variables moving as a consequence of the global shock). If the cash rate response tends to be indirect, as the lagged response in the cash rate may suggest, then a useful line of research could be to determine which global variables fluctuations most accurately signal an imminent domestic effect.