Tissue homeostasis requires balanced self-renewal and differentiation of stem/progenitor cells, especially in tissues that are constantly replenished like the esophagus. Disruption of this balance is associated with pathological conditions, including eosinophilic esophagitis (EoE), in which basal progenitor cells become hyperplastic upon proinflammatory stimulation. However, how basal cells respond to the inflammatory environment at the molecular level remains undetermined. We previously reported that the bone morphogenetic protein (BMP) signaling pathway is critical for epithelial morphogenesis in the embryonic esophagus. Here, we address how this pathway regulates tissue homeostasis and EoE development in the adult esophagus. BMP signaling was specifically activated in differentiated squamous epithelium, but not in basal progenitor cells, which express the BMP antagonist follistatin. Previous reports indicate that increased BMP activity promotes Barrett’s intestinal differentiation; however, in mice, basal progenitor cell–specific expression of constitutively active BMP promoted squamous differentiation. Moreover, BMP activation increased intracellular ROS levels, initiating an NRF2-mediated oxidative response during basal progenitor cell differentiation. In both a mouse EoE model and human biopsies, reduced squamous differentiation was associated with high levels of follistatin and disrupted BMP/NRF2 pathways. We therefore propose a model in which normal squamous differentiation of basal progenitor cells is mediated by BMP-driven NRF2 activation and basal cell hyperplasia is promoted by disruption of BMP signaling in EoE.