5 th International Annual Meeting of Sosyoekonomi Society October 25, 2018, Milan / ITALY 151 Upon Relationship between Real Exchange Rate and Foreign Trade in Turkey 1 Pelin VAROL-İYİDOĞAN (https://orcid.org/0000-0002-4632-9130), Hacettepe University, Turkey; e-mail: pelinv@hacettepe.edu.tr Emin Efecan AKTAŞ (https://orcid.org/0000-0001-7751-3275), Hacettepe University, Turkey; e-mail: eaktas@hacettepe.edu.tr Abstract The aim of this study is to examine the effect of real exchange rate movements on the foreign trade balance for Turkey over the period 1998:1-2014:3. Pesaran et al. (2001) bounds testing procedure which is employed in this context asserts the existence of cointegration between foreign trade balance and national income, foreign income and real exchange rate. ARDL model implying long-run effects indicates the validity of Marshall-Lerner condition for Turkey in the considered period. According to the estimated short-run error-correction model based on ARDL, the short-run improvements in the exchange rate deteriorates the foreign trade balance, thus J-curve effect is valid. Keywords : Foreign Trade, Exchange Rate, Cointegration. JEL Classification Codes : C32, F41. Introduction Current account deficits are one of the basic problems in the world in terms of developing economies. Although governments implement monetary and fiscal policies to resolve external imbalances, these policies mostly enable to generate the expected results. World Bank (2014) reveals that during the last five years period while in some economies such as Argentina, Brazil and Mexico, deficits have steadily increased, current account balance has improved in transition economies such as Bulgaria, Croatia, and Poland. In this context it is important to determine the extent to which the applied economic policies are effective in restraining the deficits. The Mundell-Fleming model provides a fundamental framework for investigating the effects of economic policies on the current balance. In this approach, fiscal or monetary policies determine interest rates, and accordingly the capital inflows together with the value of the national money within a small open economy, where capital movements are free. Depending on the change in the real exchange rate, the trade balance is improving or deteriorating. However, the validity of this predicted transmission mechanism depends upon the elasticity approach proposed by Marshall (1923) and Lerner (1944). In this approach, namely Marshall-Lerner condition, the improvement of the foreign 1 This study is prepared by developing the research which is supported within the transition support project to teaching fellowship of Scientific Research Projects Unit (BAP) of Hacettepe University.