The existing literature on the theoretical relationship between the rate of inflationand real stock prices in an economy has shown varied predictions about the longrun effects of inflation on real stock prices. In this paper, we present some time seriesevidence on this issue using South African data, by applying the structural bivariate vectorautoregressive (VAR) methodology proposed by King and Watson (1997). Our empiricalresults provide considerable support of the view that, in the long run real stock prices areinvariant to permanent changes in the rate of inflation. The impulse responses reveal apositive real stock price response to a permanent inflation shock in the long run, indicatingthat any deviations in short run real stock prices will be corrected towards the longrun value. It is therefore concluded that inflation does not lower the real value of stocksin South Africa, at least in the long run.
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