Examining the impact of financial development on promoting international trade in G20: a PCA and panel ARDL approach

This research examines the relationship between financial development (FD) and international trade within the context of G20 economies from 1980 to 2021. Drawing upon data from the World Bank and the international monetary fund (IMF), the research employs principal component analysis (PCA) to create a composite index of FD. Panel autoregressive distributed lag (ARDL) modelling is then utilised to investigate the long-run equilibrium relationship and short-term dynamics between these variables. The findings reveal a statistically significant positive long-term impact of FD on G20 trade. Additionally, the analysis suggests that well-developed financial systems enhance overall trade activity, with potential short-term effects disproportionately impacting imports. Granger causality tests further confirm bidirectional causality between FD and trade, highlighting their mutually reinforcing nature. By focusing on the G20, a group of leading economies with significant global trade influence, this research contributes to a more nuanced understanding of this critical nexus. The findings offer valuable insights for policymakers seeking to leverage FD strategies and trade integration initiatives to promote sustainable economic growth within the G20 framework.