Peter Carey was born in Bacchus Marsh, Victoria, in 1943. His parents ran a General Motors dealership, Carey Motors. He attended Bacchus Marsh State School from 1948 to 1953, then boarded at Geelong Grammar School between 1954 and 1960 before graduating. In 1961, Carey enrolled in a science degree program at Monash University in Melbourne, majoring in Chemistry and Zoology, but cut short his study due to a car accident and a lack of interest in his studies.

In 1962, he began to work in advertising. He worked at various Melbourne advertising agencies between 1962 and 1967, and worked on campaigns for Volkswagen and Lindeman's Winery, among many others. It was his advertising work that brought him into contact with the writers Barry Oakley and Morris Lurie who introduced him to recent European and American fiction. Carey married his first wife, Leigh Weetman in 1964.

During this time, he read widely, particularly the works of James Joyce, Samuel Beckett, Franz Kafka and William Faulkner, and began writing on his own in 1964. By 1968, he had written a number of unpublished manuscripts including novels entitled Contacts, The Futility Machine and Wog, as well as a short story collection. Several of these manuscripts were accepted by a publisher, but later rejected.

In the late 1960s, he travelled through Europe and parts of the Middle East, ending up in London in 1968, where he worked in advertising once again. Returning to Australia in 1970, he continued to work in advertising in Melbourne and Sydney.

While working in advertising, Carey wrote and published a number of short stories in magazines and newspapers such as Meanjin and Nation Review. Most of these were published in The Fat Man In History (1974). In 1974, he divorced Weetman and moved to Balmain in Sydney to work for Grey's Advertising Agency.

In 1976, Carey moved to Queensland and joined an 'alternative community' named Starlight in Yandina, north of Brisbane. He would write for three weeks, then spend the fourth week working in Sydney. It was during this time that he wrote most of the stories collected in War Crimes, as well as Bliss, his first published novel. During the 1970s and 1980s, he lived with the painter, Margot Hutcheson.

Carey started his own advertising agency in 1980, the Sydney-based McSpedden Carey Advertising Consultants, in partnership with Bani McSpedden. In 1981, he moved to Bellingen in northern New South Wales. He married theatre director Alison Summers in 1985, and some time around 1990 sold his share of McSpedden Carey and moved to New York, during the writing of The Tax Inspector.

Carey moved to New York in 1990/1991 with his wife and his son to teach creative writing at New York University (NYU). Carey and Alison Summers have since divorced and Carey now lives with the British-born publisher Frances Coady.

In 1998, he provoked controversy by declining an invitation to meet Queen Elizabeth II after winning the Commonwealth Writers Prize for Jack Maggs, many believing his response to be motivated by his Australian Republican beliefs, though he cited family and personal reasons at the time. Carey later said he had asked for the meeting to be postponed, and indeed the meeting was rescheduled by the Palace.

He has been awarded three honorary degrees and is a Fellow of the Royal Society of Literature, the Australian Academy of Humanities and the American Academy of Arts and Sciences.

Carey has won numerous literary awards, including:

In 2010, he was honoured on an Australian postage stamp.

Novels

• Bliss (1981)
• Illywhacker (1985)
• Oscar and Lucinda (1988)
• The Tax Inspector (1991)
• The Unusual Life of Tristan Smith (1994)
• Jack Maggs (1997)
• True History of the Kelly Gang (2000)
• My Life as a Fake (2003)
• A Love Story (2006)
• His Illegal Self (2008)
• Parrot and Olivier in America (2010)

Children's books

• The Big Bazoohley (1995)

Short story collections

• The Fat Man in History (1974)
• War Crimes (1979)
• Exotic Pleasures (1990)
• Collected Stories (1994) ... a collection of all the works from The Fat Man in History and War Crimes, as well as three previously uncollected works.

Short stories

• Peeling
• The Fat Man in History
• Conversations with Unicorns
• American Dreams
• Do You Love Me?
• Crabs
• Room No. 5 (Escribo)
• A Windmill in the West
• Life and Death in the South Side Pavilion
• Report on the Shadow Industry
• The Chance
• Exotic Pleasures
• War Crimes
• The Puzzling Nature of Blue
• The Last Days of a Famous Mime

Non fiction

• A Letter to Our Son (1994)
• 30 Days in Sydney: A Wildly Distorted Account (2001)
• Letter From New York (2001)
• Wrong about Japan (2005)