A Review of the Effects of the Government's Fiscal Policies on the Asset Market Performance in Iran: Application of MultipleEquilibria in a Labor Search Model

Most economic studies seek to find what economic models, whether classical, old Keynesian or New Keynesian, can explain market failures. One of the criticisms related to new Keynesian models is that these models failed to predict the crisis of 2008. This paper uses a model with a continuum of equilibrium steady-state unemployment rates to explore the effectiveness of fiscal policies in case of an economic crisis. Also, in this paper, the existence of multiple steady-state equilibria is explained by search and recruiting costs and their share in employment. This model is used to explain the current financial crisis as a shift to a high rate of unemployment in the economy, induced by the lowering expectations of the economic agents in the stock market about asset prices. The results of the study for Iran’s economy, as the extended model of Farmer (2009), shows the labor search model is useful to evaluate the performance of asset markets when the stock market is faced with uncertainty. Also, an answer is provided to the question “Can fiscal policies help us to get out of the crisis?”.