I am going to tell you a theory that will blow your mind!

I have browsed the internet, and to date, I am the only one I have found that holds this view. It is somewhat similar to your dreaming theory but adds an extra layer.

Have you ever thought about the significance of the peeling wallpaper? The hot summer days are causing the wallpaper glue to melt and is getting him high! This is why following the scenes that show the peeling wallpaper, absurd things start to happen - it's Barton Fink hallucinating!