Predicting recessions with a frontier measure of output gap: an application to Italian economy

Despite the long and great history, developed institutions, and high level of physical and human capital, the Italian economy has been fairly stagnant during the last three decades. In this paper, we merge two streams of literature: nonparametric methods to estimate frontier efficiency of an economy, which allows us to develop a new measure of output gap, and nonparametric methods to estimate probability of an economic recession. To illustrate the new framework, we use quarterly data for Italy from 1995 to 2019 and find that our model, using either nonparametric or the linear probit model, is able to provide useful insights.