Factor-augmented regressions are often used as a parsimonious way of modeling a variable using information from a large data-set, through a few factors estimated from this data-set. But how does one determine the appropriate number of factors that are relevant for such a regression? Existing...

We compare a number of data-rich prediction methods that are widely used in macroeconomic forecasting with a lesser known alternative: partial least squares (PLS) regression. In this method, linear, orthogonal combinations of a large number of predictor variables are constructed such that the...