Voluntary Participation and Exit in International Unions

Globalization is one of the main economic trends of the twentieth century. The Global Financial Crisis and the current pandemic have substantially slowed down this trend and reduced the popularity of international integration. This poses a challenge to international unions, which rely on the voluntary participation of countries. The most prominent examples of those tendencies are Brexit, tensions within NATO, the withdrawal of the US from NAFTA, or the recent international trade wars. The above phenomena pose a challenge to the economic theory of international cooperation. This theory relies on static models and does not consider the possibility of exit from international unions. This project introduces a dynamic model of international unions and the explicit option of an exit decision. The threat of exit changes optimal decision-making within unions, and the model’s dynamic nature provides new insights into the union’s optimal size and composition. In the second part of the project, the general model is applied to the case of a monetary union. The monetary union framework includes modeling the macroeconomic structure of the member economies. The novel model is used to study the motivation for bail-outs in a monetary union and their dynamic effects.