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This paper develops two instrumental variable (IV) estimators for dynamic panel data models with exogenous covariates and a multifactor error structure when both the cross-sectional and time series dimensions, N and T respectively, are large. The main idea is to project out the common factors from the exogenous covariates of the model, and to construct instruments based on defactored covariates. For models with homogeneous slope coefficients, we propose a two-step IV estimator. In the first step, the model is estimated consistently by employing defactored covariates as instruments. In the second step, the entire model is defactored based on estimated factors extracted from the residuals of the first-step estimation, after which an IV regression is implemented using the same instruments as in step one. For models with heterogeneous slope coefficients, we propose a mean-group-type estimator, which involves the …