After going to the castle of the Volcano Kingdom and talking to the Queen, she asks you to take the corpses to the cemetery for their souls to be in peace. However, you will encounter an unpeaceful soul and she will ask you to get 3 items and bring it to her restless pet, Minnie( a Bascat). Here you will find lots of evil type monsters.
Appearence: Ghost Town appears to be an very old town with many abandoned buildings and water seemingly polluted with some type of chemicals, as evident by the purple glowing water, which is not normally a trait of healthy water. There are also many gravestones, possibly implying that there was a big outbreak or maybe, as mentioned ny certian ghosts, there was a war that destroyed it.
History: If you talk to certian ghosts, you will find that there was a war that killed everybody in the town, including Minnie's owner and Minnie, thus turning it into an abandoned ghost town (as evident by the name) and leaving a lot of restless souls (such as minnie and her dead owner) to haunt the place. The mosters are also possibly the souls of people who died there and they were so suprised or angred that they turned into monsters that stalk the place.
You can encounter their evolved forms as well, once you pass a point.