The invention discloses a fiber laser self-mixing interferometer and a measurement method thereof and belongs to the field of displacement precision measurement. The interferometer comprises a distributed feedback semiconductor laser, a polarization-maintaining fiber coupler, an intra-line polarizer, a single mode fiber, an electrooptical modulator, an fiber Bragg grating, a gradient refractive index lens, a test piece, an photoelectric detector, a data acquisition and processing system, a fiber holder, one-dimensional guide rails, two-dimensional precision translation platform, a microscope, a base, a support and a signal generator. The fiber Bragg grating and the test piece form a reference outer cavity and a measurement outer cavity with the exit end face of the laser respectively for generating a double outer cavity self-mixing interference phenomenon; and the data acquisition and processing system adopts a self-mixing signal obtained by analysis by orthogonal demodulation technology to calculate the displacement of the test piece. The structure of the fiber interferometer is very suitable for measuring the nanometer displacement and vibration of the micro machines and MEMS devices and is more practical.