I agree that “Don Quixote” is the first modern novel. The primary reason, I think, is that the central characters grow, develop, and change. At the end of the book Don Quixote and Sancho Panza are not who they were at the beginning. They are influenced by each other, by the people they meet, by what happens to them; they affect the world, and the world has an impact on them. This may be at the heart of narrative realism, and you could make a case for realism (what Cervantes called “verisimilitude,” the lack of which was the reason for his attack on books of chivalry) as the great constant in the western novelistic tradition.
(Via The Elegant Variation.)