Sandra Eickmeier & Christina Ziegler, 2008, “How successful are dynamic factor models at forecasting output and inflation? A meta-analytic approach.” Journal of Forecasting, John Wiley & Sons, Ltd., vol. 27(3), pages 237-265.
Our results suggest that factor models tend to outperform small models, whereas factor forecasts are slightly worse than pooled forecasts.
Factor models deliver better predictions for US variables than for UK variables, for US output than for euro-area output and for euro-area inflation than for US inflation.
The size of the dataset from which factors are extracted positively affects the relative factor forecast performance, whereas pre-selecting the variables included in the dataset did not improve factor forecasts in the past.
Finally, the factor estimation technique may matter as well.
Summary: Not so much.