The author/narrator doesn’t seem to believe that Don Quixote is mad. In Chapter One of Book Two he explains how the conclusion to the combat between Don Quixote and the gallant Biscayan was missing from his source material, and he states,
…it seemed impossible, and contrary to every laudable custom, that such an excellent knight should be unprovided with some sage to undertake the history of his unheard-of exploits….
He goes further in his praise, while expressing his desire to know the complete history of Don Quixote,
the first who in this our age, and these degenerate times, undertook the toil and exercise of errantry and arms, to redress grievances, support the widow, and protect those damsels who stroll about with whip and palfrey, from hill to hill, and from dale to dale, on the strength of their virginity alone; …that for these and many other considerations, our gallant Don Quixote merits incessant and immortal praise….
So who exactly is this narrator, perhaps three times removed from the actual events? Is he meant to be Cervantes himself? And is he being facetious, or does he know a truth about Don Quixote which all the other characters in the book fail to recognise or understand?
After Don Quixote fells the gallant Biscayan, and the ladies of the coach beg for mercy, he demands that the Biscayan
“…go strait to Toboso, and present himself, in my behalf, before the unparalelled Donna Dulcinea, that she may use him according to her good pleasure.”
I will be interested to find out, first, if any of those he vanquishes actually do go to present themselves before Dulcinea, and, second, what happens when all these folks are running around looking for some Dulcinea del Toboso who doesn’t exist.
Tilting at Windmills 
The identity of the narrator and the relationship of all the various storytellers in this book is quite interesting, isn’t it? I’m fascinated by the fact that Cervantes isn’t just telling us the story, but has a narrator who is editing the stories told by other people. And then his characters discuss storytelling so much too. There are so many layers of storytelling here.
Yeah. I think Cervantes is criticizing the notion of a single authorial, hegemonic voice with all these layers of storytelling. One can even see a political critique here of absolute monarchy.
I personally only see Cervantes on the cover and title pages, the dedication to the Duque in Part I, and in the Prologue to Part II. I think everthing else is handled by various narrators. The author is marginalizing himself and letting a plethora of voices be heard.
So how do we know who or what to believe? Or maybe that’s the point exactly–reality is how each individual sees it.