Question: The stochastic trend model (random walk with drift) is given by: yt = 0 + 1t + t with t defined as a simple random

The stochastic trend model (random walk with drift) is given by: yt = 0 + 1t + t with t defined as a simple random walk: t = t1 + et .

The deterministic trend model is given by: yt = 0 + 1t + et where et is a stationary white noise process.

Explain the difference between these two types of trend model. Will they give similar forecasts? Why? Which one will generate forecasts with more volatility?

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