The DEFINE modelling framework has the following distinct features:

1. The economy is portrayed as an open subsystem of the closed ecosystem. It is explicitly taken into account that the production of goods requires natural resources from the environment, such as energy, matter, land and water, and generates several forms of waste, such as polluted water, hazardous material waste and greenhouse gas emissions that affect the stability of the ecosystem, having feedback effects on economic activity.

2. The economy-ecosystem interactions respect physical laws and the limits of a finite planet: DEFINE explicitly incorporates the laws of thermodynamics, the Law of Conservation of Mass, as well as the finite nature of natural resources and their imperfect substitutability in  production processes.

3. The dynamic interaction between monetary stocks and flows is coherently analysed:  In the macroeconomy and the financial system, monetary stocks are the assets and liabilities of households, firms, commercial banks, the central bank and the government, which are measured in monetary terms. Examples of assets and liabilities include the deposits of households, the government bonds and the loans of non-financial corporations. Monetary flows refer to monetary transactions that take place in each month, quarter or year, such as the payment of wages, the repayment of debt, the collection of taxes by the government and the interest payments on loans. DEFINE formalises the dynamic interaction between stocks and flows in an explicit and consistent way, following national accounting principles.

4. The dynamic interaction between physical stocks and flows is explicitly captured:  Physical stock and flows are elements of the ecosystem that are measured in physical units, such as tonnes, joules or hectares. Examples of physical stocks include the stock of groundwater, the stock of carbon in the atmosphere and the stock of material reserves. Examples of physical flows include water discharge, the generation of carbon emissions as a result of fossil fuel combustion and the extraction of matter for using minerals and metals in production processes. DEFINE formalises the dynamic interaction between physical stocks and flows using physical stock-flow matrices that follow physical accounting principles.

5. Demand-side and supply-side factors interact: As long as the economy operates below potential output, an increase in demand can increase economic activity. When demand-determined output approaches supply-determined output, inflation can arise, demand can be rationed or imports can increase (in the case of an open economy). DEFINE uses Leontief-type production functions that specify potential supply-determined output based on capital, labour and natural resources, such as energy, matter and land. Demand has an impact on supply. For example, higher demand that increases investment can stimulate labour and capital productivity or improve material/energy efficiency and the use of renewables (when this investment is green). This has direct implications for the supply-determined output and makes long-run outcomes path-dependent.

6. Money is endogenous: Money is endogenously created  when banks provide loans to households and firms. Through this endogenous creation of money, banks play a central role in shaping economic activity: their lending decisions can stimulate or restrain both investment and consumption, with broader implications for economic activity and financial fragility. Banks might be constrained in providing loans when they face insolvency and illiquidity issues or when there is insufficient loan demand. However, these constraints do not affect the fact that money can be created and destroyed quickly during boom and bust periods.

7. The financial system is an important integral part of the macroeconomy and interacts with the ecosystem: The financial system and its functions (bank lending, equity emission, bond pricing etc.) affect macroeconomic activity and, hence, environmental problems. The financial system also has an important impact on the financial feasibility of various types of green investment plans. Simultaneously, the macroeconomy influences the stability of the financial system. Since a healthy ecosystem is a precondition for a sustainable macroeconomy, the ecosystem indirectly determines the stability of the financial system.

8. Income and wealth distribution matter: The distribution of income and wealth affects consumption and investment expenditures and, therefore, economic growth, the use of natural resources and pollution. Moreover, the financial system affects the way that income and wealth are distributed, having feedback effects on debt accumulation.

The main interactions between the ecosystem, the financial system and the macroeconomy in DEFINE are portrayed in the figure below.

The DEFINE framework focuses on the following channels:

Degradation channel: Higher economic activity, which is accompanied by the use of natural resources, such as matter, water, land and fossil energy, leads to carbon emissions, the generation of hazardous waste, deforestation and other processes the degrade the functions of the ecosystem.

Depletion channel: The extraction of matter and fossil energy and the use of water for production processes contribute to the depletion of finite natural resources.

Damage channel: The degradation of the ecosystem damages capital and labour either by affecting them directly or by reducing their productivities. Ecosystem degradation also affects the productivity of land. These damages might impose supply-side constraints on economic activity, including inflation. Moreover, environmental damages affect the behaviour of households and firms, which respond to these damages by cutting consumption and investment expenditures, respectively. As a result, aggregate demand can fall, reducing economic growth.

Natural resources constraint channel: The depletion of natural resources, such as matter, fossil energy and water,  reduces their availability in the production process. This might impose supply-side constraints on economic activity.

Green financing channel: The financial system finances green investment via loans or bonds, contributing to the improvement of material intensity, water intensity, energy intensity and recycling rates as well as to the increase in the use of non-fossil energy. Hence, credit rationing and interest rates determined by banks and central banks play an important role in the decoupling of economic growth from environmental problems.

Growth channel: The financial system has both positive and negative effects on economic activity. The positive effects include the provision of finance that increases investment and, hence, economic growth. The negative effects are related to the potential rise in leverage that, under certain conditions, can harm economic activity by reducing desired investment and credit availability.

Financial (in)stability channel: The stability of the financial system is affected by macroeconomic activity. However, the links are not clear-cut. On the one hand, high economic growth is conducive to the expansion of the financial system, which might be associated with higher financial fragility (reflected in higher leverage ratios). One the other hand, low economic activity creates debt repayment difficulties that affect the stability of the financial system.

For more details about the features and the foundations of DEFINE see here and here.