Copyright © 2016 by the American Thoracic Society. Pulmonary fibrosis and emphysema are chronic lung diseases characterized by a progressive decline in lung function, resulting in significant morbidity and mortality. A hallmark of these diseases is recurrent or persistent alveolar epithelial injury, typically caused by common environmental exposures such as cigarette smoke. We propose that critical determinants of the outcome of the injury-repair processes that result in fibrosis versus emphysema are mesenchymal cell fate and associated extracellular matrix dynamics. In this review, we explore the concept that regulation of mesenchymal cells under the influence of soluble factors, in particular transforming growth factor-β1, and the extracellular matrix determine the divergent tissue remodeling responses seen in pulmonary fibrosis and emphysema.