current account. As a result, higher consumption as well as an increase in the number of domestic producers will be observed in economies that lags in deregulation. Second, a decrease in monopoly power leads to less volatile business creation, reduced countercyclicality, and weaker substitutions in labor supply to alleviate the adverse effects to productivity shocks. Third, financial deregulation contributes to a moderation of firm-level and aggregate output volatility; financial ties between two countries therefore reduce volatility in the foreign economy. The study claims that its findings are consistent with findings drawn from data following the deregulation of banks in the United States beginning in 1977.

The model of exchange rate determination of Obstfeld and Rogoff (1995) incorporates the role of current account imbalances. However, despite its initial motivation, the paper became fundamental to further research on the relation between the exchange rate and net NFA accumulation, deemphasizing the role of the latter, due to the non-stationarity revealed within the developed model. In the same line, Cavallo and Ghironi (2002) revisited the former with emphasis on the original intent; that is, the authors develop a two-country model of exchange rate determination in which stationarity and foreign asset composition play an explicit role. They explore whether the exchange rate is determined less by the exogenous money supply and more by net foreign assets. They find that the flexible-price model delivers exchange rate appreciation under a relatively favorable productivity shock; the home economy accumulates assets rather than debt. The sticky-price model generates appreciation, net foreign debt, and stock market expansion after a permanent favorable shock to relative productivity. The study proposes further research on the implications of the developed model as well as the consequences of deviations from purchasing power parity. It also suggests exploration of the performance of policy rules.

Debelle and Galati (2007) examine the consequences of the current account dynamics for the exchange rate. They show that over the past 30 years, episodes related to current account adjustments in industrial countries were associated with major slowdowns in economic growth and large exchange rate deprecations; the effects on capital flows were indeterminate. The study explains such adjustments as responses to domestic imbalances, particularly within the private sector.

At the Middle East and North Africa region level, Lane and Milesi-Ferretti (2001) reach three main findings. First, this region is extremely heterogeneous: Gulf countries hold mainly external assets, and other countries have large external liabilities. Second, in contrast to developing countries, the role of stocks of equity is increasing in Middle Eastern countries as opposed to developing ones. Third, NFA are significant, because they indicate changes in real exchange rates in the long run, as suggested by the degree of depreciation of exchange rates in debtor countries relative to creditor countries as evidence of their theory. As per cross-border investment and foreign assets in the Arab region, Elbadawi and others (2018) study the allocation decisions of SWFs in terms of both the probability of investing abroad (the extensive margin) and the level of investment (the intensive margin). They find that foreign investors have a positive bias for Arab destination countries at the extensive margin level but a negative bias against them at the intensive margin.

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