This paper studies the role of non-pervasive shocks when forecasting with factor models. To this end, we first introduce a new model that incorporates the effects of non-pervasive shocks, an Approximate Dynamic Factor Model with a sparse model for the idiosyncratic component. Then, we test the...

This paper studies the role of the Federal Reserve’s policy in the recent boom and bustof the housing market, and in the ensuing recession. By estimating a Structural DynamicFactor model on a panel of 109 US quarterly variables from 1982 to 2010, we find that,although the Federal Reserve’s...