The external sector plays a vital role in achieving economic well-being in society. The primary aim of this study is to analyse the preferences of policymakers with respect to the domestic and external sectors and the transition of these preferences to the external sector. Policymakers’ role may differ between developing and developed economies with regard to the aim of vote maximization. The results obtained from the generalized method of moments (GMM-IV) over the period 1984-2012 in the case of Pakistan indicate that policymakers’ decisions are skewed towards the domestic sector, which carries weight via budget management. This causes uncertainty in the external sector through the inflationary channel. This study attempts to draw policymakers’ attention, particularly in the context of developing countries, to the external sector. Further, it aims at alleviating the uncertainty that affects the external sector. Based on the study, some recommendations have been put forward that could help policymakers minimize their budgets and boost the external and domestic sectors to constrain inflation. Supervisor:-Dr. Musleh ud Din