ABSTRACT
From its initial formulation by Gustav-Cassel in the unsettling monetary aftermath of World War I, through the modern experience with fluctuating exchange rates since 1973, economists have been fascinated by the relationship between purchasing power parity (PPP) and exchange rate equilibrium. Indeed, Cassel took it as a virtual truism that 'As long as anything like the free movement of merchandise and a somewhat comprehensive trade between two countries takes place, the actual rate of exchange cannot deviate very much from . . . purchasing power parity' (Cassel, 1918, p. 413).
