The creation of the wooden architecture museum in Kostroma is linked to the construction of the Gorky Hydroelectric Power Station dam and the formation of the Gorky Reservoir in 1955-1957. From 1946 to 1950, expeditions from the Academy of Architecture of the USSR were sent to Kostroma region to search for valuable monuments of Russian architecture. The first expedition, led by S. L. Agafonov, began to form the museum's collection, transporting unique examples of wooden architecture from flooded areas to Kostroma, such as the Spaso-Preobrazhenskaya Church from the village of Spas-Vyozhi, which was installed in 1955 on the territory of the New City of the Ipatiev Monastery. Later, according to the project by A. V. Opolovnikov, the Church of the Nativity of the Blessed Virgin Mary from the village of Kholm was relocated, and according to the project by I. Sh. Shevelev, the Church of the Merciful Savior from the village of Fominskoye. In addition to religious buildings, peasant houses, farm buildings, baths, granaries, and mills from the 19th-20th centuries were moved to the walls of the Ipatiev Monastery.

Initially, the residents and guests of Kostroma referred to the museum as the "Kostroma Museum of Wooden Architecture," but its official names changed multiple times. In 1960 and 1971, it was known as the Museum of Folk Wooden Architecture at the historical and architectural reserve of the former Ipatiev Monastery, being part of the Kostroma Historical and Architectural Museum-Reserve. In 1972 and 2005, the museum was called the "Museum of Folk Architecture and Life" and remained a structural subdivision of the Ipatiev Monastery. In 2006, the museum became an independent legal entity under the name "Kostroma Sloboda," being a regional state budget institution of culture "Kostroma Architectural-Ethnographic and Landscape Museum-Reserve 'Kostroma Sloboda,'" established by the Department of Culture of the Kostroma Region.