In the book it's clear that Don Quixote is absolutely insane, but I don't think Cervantes had mental instability. The closest modern example I can think of is a show like the Colbert Report where the writers and performer use over-exaggeration to satirize life without actually believing that what they're doing is real. One of the things I liked though is that it's not all just slapstick, you see how much harm comes to the main character and feel sympathy for all the misfortune he suffers.