Consider the random walk with drift (et is a stationary white noise process) yt = 0 + yt1 + et Using back substitution (start with y1 = 0 + y0 + e1), rewrite the previous equation so that yt is a function of y0, a time trend and of the error term. 1

Consider the stochastic trend model yt = 0 + 1t + t with t defined as a simple random walk t = t1 + et (et is a stationary white noise process). Show that this model can be written as yt = 1 + yt1 + et