This paper presents a new thermal error modeling methodology called the Dynamic Thermal Error Modeling which improves the accuracy and robustness of the machine tool thermal error model. The characteristics of the thermoelastic system are investigated from the dynamic system viewpoint. The pseudo-hysteresis effect is revealed to be the major factor causing poor robustness of the conventional static thermal error model. System identification theory is applied to build the dynamic model for machine tool thermal error on-line estimation. The modeling procedure for the linear Output Error (OE) model is illustrated using simulation work for both one-dimensional spindle and two-dimensional machine structure thermal deformations. Model performance evaluation through spindle experiments shows that the thermal error dynamic model has advantages over the static model in terms of model accuracy and robustness.