Yes, indeed! It’s your story and you should feel free to do whatever serves your purpose best with it. I personally have done that for the book I’m currently writing, and I feel like it serves the purpose of my story better than making it happen in a real place. I’m gonna take this opportunity to add a few more things on fictional/real places:
There are advantages of creating a fictional town for a realistic story: It doesn’t limit your options. If you need a pub, you just create a pub wherever you want it to be. If your character is a veterinary, then you create a veterinary hospital. When you have a set, existing location, you’re often not allowed to do this. You can tailor it to fit your story. The town’s history, its buildings, its people, you can always tailor it to fit your story, which might come in handy when any of these details will influence your plot or characters later on.
Obviously, there are also drawbacks, such as you having to describe everything a lot more thoroughly, than you would a real town. When you have a story set somewhere that actually exists, you can just assume your readers know a little about it, and while you’d probably have to give them a few pointers anyway, you have to be a lot more detailed with a fictional town and you still might have it hard to get your point across. You might also create inconsistencies. Making up a town means that you’ll have to be extra careful during the editing/revising process because you’re likely to create inconsistencies in your stories. When you’re writing about a place that you know well or that actually exists, you can always resort to maps, pictures, etc, to make sure every street and every shop stays in its place. However, when you’re making up a place, this becomes harder, so my advice is to create a map beforehand (drawing it by hand, for instance) and to ask someone to check for inconsistencies when you’re done with your first (or second, or third) draft.
Something you also have to consider is whether you want it integrated in a place that actually exists of if you’re going to leave it completely vague. Both have advantages and drawbacks, and you can find a balance between the two. For instance, we know for a fact Hogwarts is located in England - but where specifically in England? There are a few pointers throughout the books that hint towards a specific location, but the exact whereabouts are left vague. Integrating it in an existing places helps the readers feel like it’s more real, while leaving it completely vague with no references whatsoever to nearby (existing) places or distances from other places allows the readers to be completely free of preconceived ideas when they start reading your story.
Ultimately, yes, it’s very okay to make up a fictional town/city for an existing story, but there are a few things you should keep in mind, and I hope I covered some of them for you!