Where It All Goes Down
The "Big Picture" setting for "Fra Lippo Lippi" is fifteenth-century Florence, a time and place where the Catholic Church was ultra-powerful and the Renaissance was just starting to take off with great innovations in art. Brother Lippo is certainly an example of that with his new-fangled realistic techniques (which, incidentally, the Church doesn't take kindly to).
On the more "small picture" side of things, the immediate setting is a dark alley on a night in the middle of the carnival season (the "let your hair down and let it all hang out" season leading up to the deprivations of Lent). Lippo has been accosted by the town's guardsmen on his way back home. The darkness and seclusion of the setting contribute to an atmosphere of intimacy (and the liquor doesn't hurt, either) that makes Lippo feel comfortable enough to tell the guardsmen some of his secrets—relating to his background, his life as a naughty monk, and his philosophies on art.