Trend-stationary versus difference-stationary
Two series both trend upward over time:
- Series A: (a deterministic line plus white noise).
- Series B: (a random walk with drift).
Are either stationary? Give the correct transform to make each stationary, and explain why applying the wrong one is harmful.
Show a hint
Ask whether each series' deviation from its trend is a stable, mean-reverting quantity or a wandering, permanent one. Shocks are transient in one case and permanent in the other.
Your answer
This one is open-ended. Work it through, then check your reasoning against the full solution.