The pseudostratified epithelium of the lung contains ciliated and secretory luminal cells and basal stem/progenitor cells. To identify signals controlling basal cell behavior we screened factors that alter their self-renewal and differentiation in a clonal organoid (tracheosphere) assay. This revealed that inhibitors of the canonical BMP signaling pathway promote proliferation but do not affect lineage choice, whereas exogenous Bmp4 inhibits proliferation and differentiation. We therefore followed changes in BMP pathway components in vivo in the mouse trachea during epithelial regeneration from basal cells after injury. The findings suggest that BMP signaling normally constrains proliferation at steady state and this brake is released transiently during repair by the upregulation of endogenous BMP antagonists. Early in repair, the packing of epithelial cells along the basal lamina increases, but density is later restored by active extrusion of apoptotic cells. Systemic administration of the BMP antagonist LDN-193189 during repair initially increases epithelial cell number but, following the shedding phase, normal density is restored. Taken together, these results reveal crucial roles for both BMP signaling and cell shedding in homeostasis of the respiratory epithelium.