Lithographic exposure equipment for integrated circuit manufacturing requires ever more accurate position measurement systems, which is currently led by the advent of Extreme UltraViolet (EUV)-lithography machines. This PhD-research describes an interferometric displacement measurement system that possess the potential to foresee in the need for measurement accuracy in lithography systems far into this century. Besides the demanding measurement accuracies in these machines, also the size extension of the silicon substrates from 300 mm to 450 mm presents a challenge. The progress of these aspects promotes the improvement or development of new measurement tools for lithographic exposure equipment. The aim of this research was to design a “compact heterodyne displacement interferometer for a measurement range of 450 mm that achieves sub-nm measurement uncertainty, while allowing for a modular system buildup that has a flexible optical layout and is robust enough for fast module replacement to reduce downtime”. When operating in a vacuum (or near-vacuum) environment, periodic nonlinearity (PNL) is the main factor that limits the measurement linearity of a heterodyne interferometer that is supplied by a coaxial optical beam. This research has reduced this error source by replacing the coaxial optical beam by two separated optical beams, which resulted in a decrease of PNL from 0.1 nm to 0.004 nm. This reduction eliminates the need for calibration and digital compensation and thereby enables displacement measurement of quasi-static measurement targets and measuring more real time (i.e. there is no need any more for digital PNL compensation) respectively, which was previously not possible with sub-nm accuracy. Furthermore, the implemented interferometer concept also enabled the used of optical fiber delivery instead of using free-space optical beams. The use of optical fibers ensures a flexible optical layout that is robust enough for fast interferometer module replacement and reduces downtime due to the plug-and-play nature of optical fibers. This research has additionally resulted in a new method for measurement of optical wavefronts and a new method for generating the split frequency that is required for heterodyne interferometry.