Bakhtin was particularly interested in the use of “reported speech” [chuzháya rech’]—that is, citation—in medieval literature, where “the borders between another’s and one’s own speech were fragile, ambivalent, and frequently convoluted and confused.”
Um, that was by Solomon Volkov, from his St. Petersburg : A Cultural History. Except for the bracketed part; that was by me. I don’t know where the Bakhtin quotes are from—Volkov doesn’t footnote them.
But it doesn’t really matter, does it?
It’s probably from Marxism and the Philosophy of Language, co-authored by Bakhtin and V.N. Volosinov. I don’t have the complete translation, though, just some excerpts in The Bakhtin Reader (ed. by Pam Morris), which includes a fairly lengthy portion on “Reported Speech as Index of Social Change” – but not, alas, the quote given here.
I’ve read a moderate amount of medieval romances and heroic poetry, and the story-within-a-story form is pervasive. Often, there also is a presaging of the story to be told within the story, by the mention of still another storyteller that the storyteller in the story had heard long ago. And since the originals were probably mostly originally oral, the root story comes from a storyteller rather than a book. In theory at least.
Along with this comes distancing in an indeterminate past. King Arthur was ~600 years past when the romances were told. I don’t know the present state of knowledge as to the relationship of French to Breton legend, but the Bretons were newcomers to France at the time of Arthur (furthermore, there’s a well developed theory that the Bretons were heavily-intermarried with Alan troops in the area (steppe Iranians formerly in Roman service).
And Beowulf tells of old tales from the continent, not England. The distancing seems basic to the form.