Most travelers who have serious shopping to do head to Masaya. This city's just a half-hour away by bus and home to the best markets in Nicaragua. If you're hoping to buy souvenirs in Granada, you can expect a hefty markup over the Masaya prices. Vendors gather daily in Parque Central to sell hammocks, ceramics, etc.
If you're looking for jewelry, an Argentinian-run shop on Calle la Calzada sells beautifully made and reasonably priced earrings, necklaces and rings. It's located inside Hostal Central, two blocks down from Parque Central on Calle la Calzada.
The municipal market is located two blocks south of Parque Central. Its stalls sell the usual shoes, cheap clothes, and household knick-knacks.