I am trying to understand the Fiscal Theory of Price Level (FTPL) and how it explains inflation. I've been reading several papers by Eric Leeper and I am slightly confused about some of his claims. For example in this paper he argues:
Suppose that higher deficits do not create higher expected surpluses and that central banks either peg short-term nominal interest rates or raise them only weakly with inflation. Because a tax cut today does not portend future tax hikes, individuals initially perceive the increase in nominal debt to be an increase in their real wealth. They try to convert higher wealth into consumption goods, raising aggregate demand. Rising demand brings with it rising prices, which continue to rise until real wealth falls back to its pre-tax-cut level and individuals are content with their original consumption plans.
I understand that he is explaining 'non-Ricardian' policies. However, if the government increases its deficit by issuing bonds, would that not decrease AD in the period the bonds are sold? Say that the government increases its deficit in period $t$ by selling bonds. Private agents buy these bonds and thus give up consumption goods. So in period $t$, should AD not decrease? And when the bond matures and the agents receive their payoff, they will spend it as long as the government is credible enough in not raising taxes. I might be overcomplicating things about this is just a thought I have had.
And lastly;
By preventing nominal interest rates from rising sharply with inflation, monetary policy prevents debt service from growing too rapidly, which stabilizes the value of government bonds.
I understand the reasoning that keeping interest rates stable will stabilize the debt servicing. However, suppose that interest rates rose. If the interest rate is higher than the growth rate of the economy, the government will have to monetise its debt in order to pay the interest component, this will obviously be inflationary. Or, they can issue more debt. If they choose the roll over on the debt (i.e paying the interest by issuing even more debt), will this be inflationary or deflationary? Using the same reasoning as above, I would think this is deflationary because by selling bonds to private agents, they have to give up consumption goods, thus reducing AD.
I'm trying to understand the intuition behind fiscal and monetary authority interaction. So if my questions can be answered by academic literature, I would gladly give it a read.
Thanks in advance!