This paper gives a comprehensive review of the literature on the interactio
n between real stock returns, inflation, and money growth, with a special e
mphasis on the role of monetary policy. This is an area of research that ha
s interested monetary and financial economists for a long time. Monetary ec
onomists have been interested in the question whether money has any effect
on real stock prices, while financial economists have investigated whether
equity is a good hedge against inflation. Empirical studies show that money
can be helpful in predicting future stock returns. Empirical evidence also
suggest that equity is not a good hedge against inflation in the short run
but may be so in the long run. The short-run negative relation between sto
ck returns and inflation can easily be explained by theoretical models. If
the central bank conducts a countercyclical monetary policy this will resul
t in a negative relation between inflation and stock returns, while if it c
onducts a procyclical policy we could observe a positive relation. Accordin
g to both theoretical and empirical studies investors receive an inflation
risk premium for holding equity.