Why do countries float the way they float?

Countries that are classified as having floating exchange rate systems (or very wide bands) show strikingly different patterns of behavior. They hold very different levels of international reserves and allow very different vo latilities to the movements of the exchange rate relative to the volatility that they tolerate either on the level of reserves or on interest rates. W e document these differences and explore potential causes that have been su ggested by the recent theoretical literature. In particular, we explore the role of the pass-through of exchange rate movements into prices and the co nsequences of currency mismatches in balance sheets, which we associate to a country's ability to borrow internationally in its own currency. We find a very strong and robust relationship between the pattern of floating and t he ability of a country to borrow internationally in its own currency. We f ind little evidence of the importance of pass-through to account for differ ences across countries with respect to their exchange rate/monetary managem ent. (C) 2001 Elsevier Science B.V. All rights reserved.