Cool idea, but not doing it. This is a simple RPG, meant for only a few hours of playing through. I think a system that complex would be a waste in this game.
I always thought it would be interesting to make areas effected by player interaction with the local enemies. If the player spends time grinding in a location that area should evolve into enemies that cannot be beat by the players level and gear (forcing the player to change their play style or move on to a different location). I was thinking over the span of 3 or 4 battles forcing the player to migrate, the only area this wouldn't occur would be the path the player is meant to take and instead of that area getting harder, the enemies in that location would disappear (no more encounters). Guiding the player with the "random encounters". I think the neat thing about this structure is the challenge of going your own way (cutting corners or trying to explore new areas) you will need be more then prepared and when a player dies trying to push too deep they are sent back to a local inn or in some cases where they've wandered far enough a local (witch, hunter, etc) could pick them up and the player can earn a secret side mission that would eventually take them back to the main path.
The point of making the enemies stronger would be that the player wouldn't get bored whenever he had to travel through an easy area, he would still be challenged. I don't want the player to only keep 1 weapon and low level skills throughout the game. I want to give him a chance to learn better, more complex and more interesting skills.
The last time I tried a game where the enemies leveled up I was unable to keep pace with them, gave up, and never loaded the game again. There's nothing wrong with keeping certain enemies hard or easy but you have to make sure that the player doesn't feel like getting through an area is impossible or will only happen with luck or a perfect execution of skills.
If it isn't just about making the game a challenge and there's a reason for the enemies getting stronger then you should at least make it clear. But ask yourself, what's the point of doing all the work to code in a leveling system or adding graphic resources for equipment if the net gain from them is going to be zero? I say it's better to have the main character keep his trusty sword or whatever he had at the beginning and keep the enemies the same strength.
Thanks for your input.
Monsters should not level up, that beats the whole purpose of player's progress (the stronger you are the stronger the monsters become, sometimes levelling your party is a bad thing in such games (badly balanced) because your relative power is falling down then).