Where It All Goes Down
Dreamland
Who is our narrator? Why is he in jail? What is he taking to make him sleep so long? Ah, unanswerable questions. Because the "real life" setting of the jail only enters for two sentences in the whole story, however, they're also not all that important. The real setting of Bunyan's story is the dream world where the pilgrim, Christian, journeys from the City of Destruction to the Celestial City.
There are allusions to non-allegorical places throughout, like the Holy Land mentioned at the Delectable Mountains and the European countries represented at Vanity Fair. These allusions allow Bunyan to comment on the politics of his time even when he's guiding us through his very trippy dreamscape.
But he set his story in an unidentifiable dream-setting for a reason: he wants this to be relatable to the lives of all his readers, no matter what countries or time periods they live in.
Bunyan is writing about aspects of life and Christian truths that, to him, transcend time and place. For this reason, he also needed a setting that transcends time and place. This is the function of allegory, and the situation of a dream fits this purpose like a glove.