This paper investigates the long run and short run determinants of financial euroization (FE) using both linear and threshold models. We model deposit euroization (DE) and credit euroization (CE) in Croatia, a post-transition country recording very high and persistent unofficial FE. Results suggest that only portfolio view is important for explaining DE and CE. Market failure view does not seem to matter for FE in Croatia. Both nominal and real exchange rate changes have a strong effect on FE in the long run, the former is more important for DE, while the latter for CE. CE is also determined in the short and long run by matching behaviour of banks’ foreign currency position. Both DE and CE respond to changes in inflation and exchange rate volatility. Threshold cointegration confirms that FE determination is subjected to significant threshold effects while error correction models suggest FE adjustment is very slow and asymmetric, partly due to very strong FE persistence.

Ekonomija