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Hourly labor costs in the manufacturing sector of seven EC countries, the USA and Canada are used to test the factor price convergence (FPC) by employing Johansen’s multivariate cointegration tests. We also examine if there is a two‐way causality in wages between two groups of countries covered in this study. Both objectives are evaluated by developing error‐correction models for Western Europe and North America. Our empirical findings provide support for the FPC and the existence of a long‐run equilibrium cointegration relationship among labor costs in manufacturing. The estimation results of error correction models show that a feedback causality exists between manufacturing labor costs in North America and Western Europe.

This research applies the loanable funds theory in an international framework to investigate government borrowing's effect on U.S. interest rates. The equations estimated offer little support for the hypothesis that government borrowing raises interest rates and no evidence that inflows of foreign capital offset the effect of government borrowing.