What is the impact of the exchange rate regime on inflation, interest rates and economic activity? In this paper we provide novel evidence surrounding the gains of a pegged exchange rate regime. We first emphasize that countries with a fixed exchange rate regime tend to have persistently lower inflation and interest rates. In addition to that, we document that volatility of nominal variables is lower with a fixed exchange rate. Last we find that countries that enter a fixed exchange rate regime tend to experience a subsequent increase in GDP growth. We rationalize these findings with a calibrated small open economy model that emphasizes the lack of commitment of central banks when the exchange rate is flexible. In such a regime, an inflationary bias arises that lowers consumption. Pegging the exchange rate to a stable anchor lowers inflation and its volatility by a similar magnitude as in the data. This persistent decline in inflation is beneficial for the economy and leads to an increase in GDP.