Chinese Business Review, Sep. 2017, Vol. 16, No. 9, 419-428 doi: 10.17265/1537-1506/2017.09.001 Testing the Hypothesis of J Curve for Turkish Economy ∗ Süreyya Yılmaz Çağ University, Yenice, Mersin, Turkey İbrahim Özaytürk, Gürçem Oransay Çukurova University, Adana, Turkey The purpose of this paper is to find the relationship between balance of foreign trade and real exchange rate in econometrics concept by using time series method. The authors used annual data of foreign trade deficit, real exchange rate, gross domestic product (GDP) of Turkey from 1989 to 2014, and analyzed the long-term relation of them by using ARDL bound testing method. By the result of test method; although there was a long-term relationship between balance of foreign trade, real exchange rate, GDP of Turkey and of the world, the coefficient of real exchange rate was insignificant in terms of statistical methods. Turkey and the world as well as being statistically significant coefficient of GDP, it was concluded that there was significant relationship with the economic aspects. Keywords: foreign trade deficit, real exchange rate, J curve effect, ARDL bound test Introduction The effect of increasing of instability of exchange rate on foreign trade balance has been the reason of attracting attention of economists after Bretton Woods collapsed. This effect is also widely used in research papers by economists. However, there was no any consensus about the direction of this effect. Although there were lots of research papers for a negative effect of increasing of instability of exchange rate on foreign trade (Wilson, 2001; Kızıltan & Ciğerlioğlu, 2008; Coşkun & Taylan, 2009), many research papers proved that it is not certain (Arize, 1994; Bahmani-Oskooee & Alse, 1994; Onafowora, 2003; A. Kasman & S. Kasman, 2005; Brada, Kutan, & Zhou, 2005; Karaçor & Gerçekler, 2012; Aral, 2015). Furthermore, several research papers reached some finding that there is no any significant relationship between instability of exchange rate and balance of foreign trade (Zengin & Terzi, 1995; Sivri & Usta, 2001; Yamak & Korkmaz, 2005; Karagöz & Doğan, 2005; Yılmaz & Kaya, 2007; Aktaş, 2010). As seen on previous research papers, there is no any consensus among researchers to understand the interaction of exchange rate and balance of foreign trade on different periods. The similar things may say for different countries based on same subject. At this point, the purpose of this paper is to make an analysis of the effect of instability of exchange rate on foreign trade. The first section has correlated with this effect based on related hypothesis. The second section is related to some other researches which are in literatures and their ∗ This article was presented on International Cogress of Management, Economy and Policy in 2016. Süreyya Yılmaz, research assistant, International Banking and Finance, Çağ University, Yenice, Mersin, Turkey. İbrahim Özaytürk, Ph.D. student, Economics, Çukurova University, Adana, Turkey. Gürçem Oransay, research assistant, Economics, Çukurova University, Adana, Turkey. Correspondence concerning this article should be addressed to Süreyya Yılmaz, International Banking and Finance, Çukurova University, Yasar Baybogan Campus, Adana-Mersin Highway, Yenice 33800, Turkey. DAVID PUBLISHING D