  We show that capital flow (CF) volatility exerts an adverse effect on
exchange rate (FX) volatility, regardless of whether capital controls have been
put in place. However, this effect can be significantly moderated by certain
macroeconomic fundamentals that reflect trade openness, foreign assets
holdings, monetary policy easing, fiscal sustainability, and financial
development. Passing the threshold levels of these macroeconomic fundamentals,
the adverse effect of CF volatility may be negligible. We further construct an
intuitive FX resilience measure, which provides an assessment of the strength
of a country's exchange rates.
