What is Intertemporal Equilibrium

An intertemporal equilibrium is an economic concept that holds that the equilibrium of the economy cannot be adequately analyzed from a single point in time, but instead should be analyzed across different periods of time. According to this concept, households and firms are assumed to make decisions that affect their finances and business prospects by assessing their impact over lengthy periods of time rather than at just one point.

BREAKING DOWN Intertemporal Equilibrium

An example of an individual making an intertemporal decision would be one who invests in a retirement-savings program, since he or she is deferring consumption from the present to the future. A similar term, intertemporal choice, is an economic term describing how an individual's current decisions affect what options become available in the future. Theoretically, by not consuming today, consumption levels could increase significantly in the future, and vice versa. The economist Irving Fisher formulated the model with which economists analyze how rational, forward looking people make intertemporal choices, that is choices involving different periods of time.

Intertemporal decisions made by companies include decisions on investment, staffing and long-term competitive strategy.

Intertemporal Equilibrium and the Austrian School

In Austrian economics, intertemporal equilibrium refers to the belief that at any one time the economy is in disequilibrium, and only when examining at it over the long term that it is in equilibrium. Austrian economists, who strive to solve complex issues — economic ones — by conducting thought experiments, postulate that the interest rate coordinates the intertemporal equilibrium by best allocating resources throughout the production structure. Thus intertemporal equilibrium can only be reached when individuals' consumption and investment choices are matched with the investment being carried out in the production structure which will allow goods to come to market in the future, in accordance with the time preference of the population.

This is a central tenet of the Austrian School, represented by economists such as Friedrich Hayek and Ludwig von Mises who believed that the genius of the free market is not that it perfectly matches supply and demand, but rather that it encourages innovation to best meet that supply and demand