Protein phosphatase-2A (PP2A) is a primary serine-threonine phosphatase that modulates inflammatory responses in asthma and chronic obstructive pulmonary disease (COPD). Despite its importance, the mechanisms that regulate lung PP2A activity remain to be determined. The redox-sensitive enzyme protein tyrosine phosphatase-1B (PTP1B) activates PP2A by dephosphorylating the catalytic subunit of the protein at tyrosine 307. This study aimed to identify how the interaction between the intracellular antioxidant glutathione peroxidase-1 (GPx-1) and PTP1B affected lung PP2A activity and airway inflammation. Experiments using gene silencing techniques in mouse lung or human small airway epithelial cells determined that knocking down PTP1B expression blocked GPx-1's activation of PP2A and negated the anti-inflammatory effects of GPx-1 protein in the lung. Similarly, the expression of human GPx-1 in transgenic mice significantly increased PP2A and PTP1B activities and prevented chronic cigarette smoke-induced airway inflammation and alveolar destruction. GPx-1 knockout mice, however, exhibited an exaggerated emphysema phenotype, correlating with a nonresponsive PP2A pathway. Importantly, GPx-1-PTP1B-PP2A signaling becomes inactivated in advanced lung disease. Indeed, PTP1B protein was oxidized in the lungs of subjects with advanced emphysema, and cigarette smoke did not increase GPx-1 or PTP1B activity within epithelial cells isolated from subjects with COPD, unlike samples of healthy lung epithelial cells. In conclusion, these findings establish that the GPx-1-PTP1B-PP2A axis plays a critical role in countering the inflammatory and proteolytic responses that result in lung-tissue destruction in response to cigarette smoke exposure.